Tag Archive | Entrepreneurship

“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?

Culture of the Culture

I have spent a lot of time traveling the past week and a half (SF -> Boston -> Philly -> Columbus -> Chicago -> New York -> Philly -> SF) and in the course of doing so have just totally destroyed two sci-fi novels by Iain M. Banks, who I had never read before.  I had heard good things, and vaguely knew that it dealt with a true post-scarcity future, where technology is truly arbitrarily advanced and the major social problems have been, more or less, settled.  It is “run” (not really) by Minds, super-advanced artificial intelligences that run space habitats and the massive starships that roam between them.  Since I’ve been thinking about robots a lot recently, they seemed worth a look.  In the books, with such a “utopian” culture most of the narrative tension and excitement comes from interacting with the less civilized or differently civilized. And as sci-fi they are just great.   As a political-technological parable they stretch plausibility in some ways.

The foreign policy of the Culture is conducted in a semi-anarchic environment, which is interesting and internally consistent – the divisions in technology and thus power across a galaxy dwarf the divisions on Earth, and so basically the only really relevant powers are a small set of the most advanced, the Culture amongst them.  Since a single Culture-equivalent warship could more or less obliterate any lesser civilization, the top dogs oligarch-ily set the rules for the greater galactic meta-civilization.  There is no overarching government, but a generally-agreed-upon set of guiding principles that tend to be enforced by the major players.  And since amongst them there’s no real areas of conflict other than ideological, they can usually count on each other to keep the peace.   But, as you might imagine, there’s generally lots of territory to cover, a lot of different types of motivations, and widely varying ideological beliefs and so some real room for conflict and exciting stories.

However, the domestic side of the Culture has barely existed in these books.  I can think of basically one real scene amongst the two novels set in Culture society proper, and it’s a Culture immigrant/refugee going out to a danceclub.  The relevant actors are the Minds, who roar across the galaxy going about their business and taking their merry crews of humans along for the ride.  Humans and the associated species are basically just along for the ride in the larger societal sense as well – it’s an AI-based civilization that happens to have many biological residents.  It should be noted that the Minds are generally portrayed as somewhat eccentric but mostly good-natured and personable**, and their society is depicted in detail.  But the human Culture culture (har har) is absent.  The ineluctable conclusion that an alert reader must draw is that Culture society is really fucking boring.

A society without problems lacks drama – an original conclusion, I know.  But I will suggest that it suggests a certain lack of imagination.*  If there’s anything I’ve learned in spending some time around the highly-skilled and –motivated, it’s that people will find challenges to overcome.  The rich of Silicon Valley are the opposite of idle.  Nobody retires at 35 when they cash their IPO check – they go start something new.  Entrepreneurship as we know it won’t survive the transition to the post-scarcity economy, but something will.  People will create opportunities to do cool stuff.  Even if 99.9% of society loses itself in drugs, sex, and general chillaxitude there will be plenty of people that will be looking to create some drama and make a name for themselves.

Zuckerberg famously said the motto of Facebook is to “move fast and break things.”  There’s no one quite like him, but he’s far from the only person who looks at the world that way.  I’d like to see a collection of all-powerful but good-natured AIs put a stop to that.

 

*: “Certain” does a lot of work here.  Banks is a ferociously creative writer that I heartily recommend to sci-fi fans.

**: English doesn’t accommodate non-human intelligence well.  I suppose comp-lit students in the 2070s will say our speech is inherently “bioist”.

Entrepreneurialism != “The Economy”

Conservatives love to harp on the (mainly imaginary) regulatory excesses of Barack Hussein Obama, which have apparently made it impossible to start a small business in this country.  Which, living in San Francisco, is news to me.  However, there are actually countries in which the crushing weight of government regulation make it impossible to start a successful small business, and not just North Korea.  France has a thriving economy, but it has such a mass of red tape, and such inflexible labor practices, that it is actually extremely difficult to start a thriving startup in the Silicon Valley mode.  Go read the Times piece – it’s an interesting look at what the imaginary “Obamanomics” would look like in terms of the consequences for entrepreneurship.  Here’s my question – does this materially affect economic growth?

While this sounds crazy, I think we ought to consider France as a component of the global economy, and even just of the regional European economy.  France has many large corporations and highly skilled managers and engineers, and its economy is doing just fine.  It makes perfect sense if you consider that entrepreneurship, like all other economic activity, is governed by comparative advantage.  As the article mentions, French culture is actually pretty hostile to entrepreneurship and aspiring entrepreneurs are likely to flee to London (and probably Berlin, startup hub of Europe).  It sure seems like France’s comparative advantage lies in Areva (the gigantic state-run nuclear company) rather than letting a thousand flowers bloom.  And the aspiring French entrepreneurs in turn go to the startup hubs which perform better due to the influx of French entrepreneurs.

It’s clear that having a startup hub is great for the local economy.  But no one knows how to start one from scratch, which suggests it is difficult.  Furthermore, the network effects thought to drive the prosperity of these hubs have positive returns to scale…which suggests that with a fixed number of entrepreneurs divided among a greater number of hubs, the total level of value creation drops.  A greater number of startups in Paris would bring some incremental activity…but does it outweigh the reduced productivity of London’s startup scene?  Zuckerberg moved out West because it was the only place Facebook could become Facebook – and while the money flowed to Menlo Park, the consumer surplus flowed to the whole world and everyone became better off.

Plus, there are of course good reasons for France’s restrictive labor laws – they greatly enhance the quality of life for the non-entrepreneur in France.  So this article is illuminating of the choice between economic comfort and economic dynamism, but it’s not at all clear that France is making the wrong tradeoff here.