Stimulus for Entrepreneurs

By / 7.28.2011

The debt-ceiling stalemate is distracting policymakers’ attention from what should be their number one economic priority: putting Americans back to work. Big jolts of conventional stimulus, through public spending or tax cuts, are off the table for now, but Washington could try a different tack — stimulating entrepreneurship.

So says economist Robert Litan of the Ewing Marion Kauffman Foundation, who unveiled last week a creative menu of proposals for rebooting America’s entrepreneurial spirit. These ideas have been incorporated into the Startup Act, a bipartisan proposal endorsed by an unlikely pair of political bedfellows, House Majority Leader Eric Cantor (R-Va.) and Senator Jon Tester (D-Mont.)

Litan’s offering came on the heels of a new Kauffman study that shows why Congress should be thinking about ways to spur entrepreneurship. Startup job growth, which Kauffman says is the main engine behind net job growth in the United States, has been slowly declining. This drop began before the Great Recession. What’s more, the survival rate of new firms is declining, along with the number of jobs created on average by new startups.

No one seems to know why start-ups have been losing momentum. But Litan, also a senior fellow at the Brookings Institution, argued that public policy can be a catalyst for new business creation, just as it can also put obstacles in the way of entrepreneurs. The Startup bill’s provisions fall in four main baskets: selective immigration reform, easier access to capitol, streamlining the commercialization of new ideas, and resetting the regulatory burden on businesses.

Immigration reform: The bill advocates green cards for any foreign student that completes a STEM (science, technology, engineering, and mathematics) degree at a U.S university and more easily available visas for non-American future entrepreneurs. Litan specifically suggested targeting talented individuals currently working in America on 6-year H-1 visas, a demographic that starts new firms at a higher rate than the rest of the workforce, as an easy starting point for reform.

Financing startups: At a time when credit is tight, the bill would generate capital to finance new startups from two sources: tax breaks and easier access to public markets. It proposes a capital gains exemption for long-term investments (those held over five years) in startups with a market value of less than $50 million. To give more startups a fighting chance to survive, the bill also would exempt them from the corporate income tax for the first five years. In addition, the act suggests would allow shareholders of startups under $1 billion in market value to decide whether or not to comply with the Sarbanes-Oxley Act, arguing that the cost of compliance for startups far outweighed any benefits compliance could provide.

Patent Reform: The bill also endorsed recent patent reform passed by both the House and Senate designed to make the process more efficient. Under this approach, smaller startups would be allowed to pay less for a priority patent review.

Regulatory Reset: Finally the plan calls for regulatory reform as well as data collection on individual states – ranking them on how well they create a favorable climate for startups. It would require a cost-benefit analysis for all proposed rules and subject them to automatic, 10-year sunset requirements. State rankings would provide states with the motivation to decrease their regulatory burden and attract more new business.

At a recent forum, Litan noted that the government seems to be out of fiscal policy bullets to jolt the economy back to life. By creating a climate more conducive to the birth and survival of new firms, however, the U.S. could spur job creation at a relatively modest cost that won’t break the bank.

Photo Credit: Ewing Marion Kauffman Foundation