“Startup Tax Cuts” Are Terrible Ideas

Warning – this is a post without empirical evidence.*

One of the most frustrating things ever is hearing the argument that tax incentives will bring startups to Our Depressed Rust-Belt Mid-American City.  First of all, startups won’t replace the thousands of jobs lost when the old cancer paper mill closed down – startups will employ far fewer people, and they will be mostly importing their talent from other cities/states/countries.  That’s not terrible – those employees will still need meals cooked, lawns mowed, clothes cleaned, etc.  The ancillary jobs of a thriving startup scene are often decent ones – but the good high-paying jobs won’t go to locals.  No, the real issue with these policies is thinking that startups make decisions based on taxes.

A startup is a machine designed to turn ideas into products, and sometimes products into revenue, and products + revenue into growth.  Notice a very important word that isn’t in that description?  Profits. Very few startups are profitable from the get-go, and most aren’t meant to be – even the ones with massively positive cash flows show little or negative accounting profit.  That’s because all of that cash is shoveled into growth.  People starting startups couldn’t give two shakes about the statutory corporate tax rate because you need profits for taxes, and profits are unimaginably far away.  When and if a startup becomes big enough to become profitable, it’ll already be domiciled someplace exotic with nice weather, secretive banking laws, and even more flexible tax codes.

There are tax incentives startups would care about a lot – incentives that make hiring talent cheaper.  Rebates for payroll taxes are one very promising avenue.  Today, payroll taxes are split half and half between employer and employee – for employers, it’s a tax on hiring people, and for employees it’s a flat tax on pay.  If a local government offered payroll tax rebates to startups, that’s huge – it makes it cheaper for you to employ someone, and it makes their salary worth more.  That’s actually a competitive advantage that could make it more appealing for a startup to relocate to Our Struggling Example Of Faded Mid-Century Glory And Metaphor For America’s Decline.

Tax incentives are good for existing businesses – but a narrow subset.  Mid-sized businesses (small enough to feasibly relocate) with healthy profits (so the tax rate matters).  Those are nice to have – but they’re hardly startups, and they’re not the type that grow quickly enough to revolutionize your city’s economy.  Cutting corporate tax rates is basically orthogonal to the goal of encouraging startups, and I wish this tired old cliche were tossed out.

*: Don’t you wish more people warned you?

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  1. SOCIAL SECURITY TAX 2014 - February 27, 2014

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