ON-Lion Letter

Entrepreneurship is the engine that powers the American economy.  Entrepreneurs -- who drive the cycle of competition, change, and adaptation -- are the catalysts of creative destruction and America's economic growth.  Their risk-taking spurs innovation; they challenge old ways of doing things, construct better alternatives, and force the market to adapt.

As James Pethokoukis notes in his new book on startups and entrepreneurship that is part of the Room to Grow series, however, innovation and entrepreneurship in America have been trending downward during the last 30 years.  For example, the ratio of new firms to all firms dropped from 15% in 1978 to 8% in 2011.  This is not to claim that America's entrepreneurial spirit has diminished.  After all, innovators and risk-takers founded Google, Facebook, and Uber in this period.  Instead, rules, regulations, and bureaucratic red tape hamper entrepreneurs.  These range from occupational licensing standards, which constrain new small businesses, to national regulatory boards like the Federal Communications Commission, the Environmental Protection Agency, and the Consumer Financial Protection Bureau, which impose undue costs on what could be groundbreaking new ventures.

Pethokoukis is the DeWitt Wallace Fellow at the American Enterprise Institute (AEI) in Washington, D.C., and editor of its AEIdeas blog.

Entrepreneurship drove America's record growth in the 20th Century.  Replicating that success in the 21st will require creating a business climate friendlier to innovation, Pethokoukis believes.  He provides important policy suggestions. First, the federal government could grant investors a pass on capital-gains taxes if they invest their proceeds in a business five years old or younger.  The federal government could also provide tax breaks to new businesses, including a 5% tax rate for these firms.  Sunset clauses and extra oversight for regulations could restore accountability and begin the process of removing unnecessary rules.  Finally, the intellectual-property system could be revised to limit advantages of market incumbents without harming the rights of investors.

The Lynde and Harry Bradley Foundation in Milwaukee substantially supports the Room to Grow series.  Bradley also supports AEI.

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