What the Government Could Really Do to Support Entrepreneurs

Innovation and entrepreneurship are becoming my two least-favorite words, mostly because they are being appropriated in ways that are neither innovative nor entrepreneurial. Like in today’s New York Times essay by Tom Friedman.
Friedman used to be one of my favorite writers. In Beirut to Jerusalem, when he talked about two sheiks on a flight to the Middle-East tossing bricks of gold back and forth, he was compulsively interesting.
But now that Friedman is back in the U.S., he occasionally seems less like a world-wise foreign correspondent than a credulous, honey-didja-see-that tourist. This article on entrepreneurs is just a bad example. First, he doesn’t bother to talk to actual entrepreneurs. As he himself admits, his essay mostly comes from two academics at non-profit institutions:
I asked two of the best people on this subject, Robert Litan, vice president of research and policy at the Kauffman Foundation, which specializes in innovation, and Curtis Carlson, the chief executive of SRI International, the Silicon Valley-based innovation specialists.
What’s odd about Friedman choice of sources is that he opened the essay by criticizing the Obama administration for being too “heavily staffed by academics, lawyers and political types.” Yet his first source, Robert Litan — a great thinker and writer — is three for three: he worked as an academic, studied law at Yale, and often writes government reports (incidentally, Litan also wrote an essay in the New York Times that prompted us to testify before Congress). The other source, Curtis Carlson, lists his primary avocation as the violin.
True to form, these folks have proposed a new government department of entrepreneurialism, headed by a cabinet-level minister called “Secretary Newco.” Like low-salt Chinese cooking, this sad phrase is a contradiction in terms: what government minister is an entrepreneur?
Friedman briefly mentions an entrepreneur’s visa, which is a worthy goal, but then suggests we offer a visa to any foreign student who graduates from a U.S. college. Regardless of how I may feel about immigration, this is an overly broad, unrealistic suggestion: someone who studies hotel management at UNLV isn’t likely to start a company just because she’s from the Congo or Italy.
Friedman then proposes “cut[ting] the capital gains tax for any profit-making venture start-up from 15 percent to 1 percent.” This is nonsense: a venture-funded startup usually isn’t “profit-making,” and in any event a startup doesn’t pay capital gains taxes. Employees and investors pay capital gains taxes when selling the stock of a company that was, at some point in the past, a startup.
Moreover, the capital gains tax as it stands is not a problem: the most tax-efficient way to become a millionaire is by selling stock in your own company. You pay a lower tax rate on that money than most middle-class Americans. Friedman also calls for lower rates of corporate income tax on startups, even though a startup would only pay taxes once it began making profits. In four years, Redfin has barely paid any corporate income taxes, and now that we sometimes earn money, we don’t mind the tax.
The errors continue, with Friedman riding the old battle-horse to repeal “Sarbanes-Oxley reporting for new companies.” But new companies don’t have a Sarbanes-Oxley reporting requirement. Sarbanes-Oxley only applies to publicly traded businesses, which are usually at least five years old.
Even if Friedman is talking about lifting Sarbanes-Oxley requirements for companies in their first few years as a publicly traded stock, I think he is missing the point. As we’ve argued before, the reason for the dearth of IPOs hasn’t been due to Sarbanes-Oxley laws but because, a few years ago, so few startups were generating consistent profits, and so few entrepreneurs were interested in the long haul.
Finally, Friedman talks about policies that “encourage private investment.” He seems oblivious to the fact that too much money is what’s breaking venture capital right now. We don’t have a shortage of capital, or even a shortage of ideas. We have a shortage of engineers.
And this is precisely where government can help. My alma mater, U.C. Berkeley, has long been one of the principal sources of engineering talent in Silicon Valley. Last year, Berkeley was forced to cut its budget by $813 million, or 20%. Top-flight professors are leaving the nation’s leading public university in droves. The same scene is replaying itself across the U.S., including here in Seattle at the University of Washington.
You would think the whole Valley would be up in arms over such a calamity. I for one wish Friedman would have mentioned undergraduate education somewhere in his essay. Within the technology community, we all know that the reason America is #1 in technology isn’t because of our regulations, cabinet ministers or tax code; it’s because we have had the best universities in the world, which produce the best thinkers, scientists and engineers. We have only recently come to realize how delicate those universities are.
This is why I just can’t bear to hear folks talk about Secretary Newco, cutting the capital gains taxes for millionaires and billionaires, or eliminating the Sarbanes-Oxley regulations that emerged after Enron struck the first of many blows against our faith in public markets. Our once-proud research institutions are struggling to fulfill their mission in society. They need the government’s support. They need Tom Friedman’s support. They need your support.
If we’re going to rally behind a cause, we don’t have to look further than that.