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Obama’s open to all ideas for the economy – here’s one of mine

November 6, 2010

Paul Ryan and his republican cohorts claim to want an entrepreneurial society that fosters small independent business.  Obama’s rhetoric regarding small business isn’t too different.  So, in the spirit of bipartisan Obamian compromise, and in answer to Obama’s recent statement that he’s interested in any idea to help the economy, I’d like to propose mine.  The idea, call it Plan X, would enable far more people to start and maintain a small business and it would be done strictly through the tax code.

Perhaps the biggest problem for small business is access to capital – it’s either near impossible or the interest rates are exorbitant.  Potential entrepreneurs not only need to beg for money, they are forced to take extraordinary risk in that they must put up their entire life savings in order to have their chance.  Plan X is centered around providing far easier access to capital at much lower risk.

An essential aspect of Plan X is to allow the business owner to choose a high tax rate.  What?!  Sounds crazy – how can that possibly help?  But the thing is it’s not at all crazy – high tax rates can be a significant benefit to a venture because, in effect, they bring in a partner to share losses.  As long as losses are fully deductible, a high tax rate minimizes risk.  It’s no different than having an actual partner to share profits and losses but without all the potential headaches of a partner.

The first change, then, would be to allow a small business to declare its tax rate in advance for an upcoming intermediate term period – say five years.  It could be anywhere from today’s standard rate to a high of say 80%.  We would be giving an entrepreneur the option of taking a guaranteed partner.  I’d also propose that initial start up costs would be eligible for a tax credit at the declared tax rate to be paid back over some future period based solely on profitability.

We would need to permit full deduction of business losses in the current year and enable a full tax credit for the loss.  Wealthy individuals with diverse sources of income already have this benefit as losses are offset against other income.  We should provide the same benefit for small businesses who don’t have this luxury.

Such a plan would seem to provide great opportunity for those without access to capital.  Individuals could start a business with only a 20% cash investment and would not have to pay interest to a bank or risk their entire life savings should the business fail.  True, the higher tax rate will reduce the owner’s share of income but that downside would be more than offset by the opportunity to get into business in the first place.  I would propose that after the intermediate tax term (five years per above), the owner could re-establish the tax rate and the resulting risk / reward ratio.

We would see a vast increase in the number of small businesses.  Some would ultimately fail but keep in mind individuals would be putting at least 20% of their own funds into the venture which should help minimize the failure rate.  The program could result at times in a net monetary outflow for the government but this is far from certain since tax revenue should increase from the expanded economic activity.  If needed, financing could take place through monetary creation and higher taxes on income.

Plan X would eliminate much of the power of banks and Wall Street and also put the average person at a far more advantageous position versus capital and big business.  It would foster greater competition and provide a new way to achieve a level of self reliance.  It doesn’t answer all problems of society, certainly.  But why not put our money where our mouth is and truly support small business?

How about it, Paul Ryan?

From → Wealth & Poverty

One Comment
  1. D.J. Hoy permalink

    Expand on this, if you would. I have to think about this. Thanks.

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