Obama Ignored Entrepreneurship in State of the Union
David Allen /
In the State of the Union, President Obama talked about many of the priorities he has for the nation moving forward.
But entrepreneurship, it seems, isn’t one of them.
In his 6,493-word speech, the phrases “entrepreneur” and “small businesses” each appeared only once. The only time Obama did directly mention helping entrepreneurs was while pledging to pursue net neutrality regulations, a policy which would actually harm entrepreneurs by undermining start-ups and stifling innovation.
Entrepreneurship is a critical component of any economy. By promoting innovation and discovery, entrepreneurship improves efficiency, increases productivity and fosters economic growth. Studies show that start-up businesses account for most of the new job creation in the economy.
Today, the number of self-employed people is the same as it was in 1985, despite a population that is 34 percent larger.
Obama’s failure to address entrepreneurship is all the more troubling given its continued decline here in the U.S. The Brookings Institution found that the rate of firms going out business now exceeds the rate of new business formations. In their 30-year study, this had never happened prior to 2008.
The number of self-employed people has fallen steadily since 2006. Today, the number of self-employed people is the same as it was in 1985, despite a population that is 34 percent larger.
Both the number of initial public offerings and the share of firms aged 16 years old or younger have fallen significantly over the previous two decades. Collectively, these statistics point to dropping entrepreneurial activity and decreased economic vitality.
What is responsible for this trend? While the decline of entrepreneurship can be attributed to many factors, poor tax policy is one of the most important. In a recent report by the World Bank assessing the favorability of different countries’ tax policies to starting a business, the U.S. ranked 47th. A panel of experts at Heritage last week offered advice on reforming our tax code in a way that will facilitate increased entrepreneurship. Here were some of their specific policy suggestions:
- Make Section 179 Expensing Permanent at $1 million. Section 179 of the tax code allows businesses to deduct up to a certain amount annually in business expenses (machinery, equipment, etc.). It is set to renew periodically via Congressional approval for an extension. Since Section 179 was first implemented in 1958, the maximum deduction amount has been changed many times during this extension process. Last year the limit was $500,000; this year it is $25,000. Both amounts are too low. Raising the limit to $1 million will lower the cost of capital substantially and aid small business cash flow. The $1 million limit should furthermore be made permanent; this will prevent Congress from changing the deduction amounts on a continuing basis, which will in turn remove uncertainty and make it easier for small businesses to plan their investments.
- Lower the Capital Gains Tax. The capital gains tax creates a bias against saving by taxing investment income twice. This raises the cost of capital for potential investors, and reduces the availability of critical start-up funds. Obama’s proposal to raise the capital gains tax from 23.8 to 28 percent is counterproductive and will further discourage investment. It would likely even reduce revenue, as more investors will hold off on realizing gains in order to avoid the tax. Congress and the president should instead pursue a lower rate.
- Simplify the Tax Code. Our outdated tax code is riddled with deductions, qualifications and exemptions that greatly add to the complexity of starting and running a business. Americans currently spend 6.1 billion hours each year complying with our tax code. Entrepreneurs thus end up wasting time and energy that could have instead been invested in their business. A comprehensive overhaul of our tax laws is necessary to help entrepreneurs get their businesses off the ground.
Obama needs to start making entrepreneurship a priority as he begins his final two years in office. Establishing permanent expensing, reducing capital gains taxes and devising a simpler tax code are constructive reforms Obama and Congress should pursue in order to spur entrepreneurial activity and generate economic growth.