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Taxing Entrepreneurship

The government pays a lot of lip service risk-taking, entrepreneurship and small business. In fact, many believe that it can be advantageous for tax purposes to be an entrepreneur (write-offs, SBA loans, hiring family members, etc.). In a fascinating blog post titled Should We Worry about the Rising Inequality in Income and Wealth?, Judge Richard Posner considers how a high marginal taxes effects entrepreneurs and other risk takers:

What are the causes, and what are the effects, of this trend in the income (and of course wealth) of the highest-earning segment of the distribution? Part of it is reduced marginal tax rates, because high marginal tax rates discourage risk-taking. Consider two individuals: one is a salaried worker with an annual income of $100,000 and good job security, and the other is an entrepreneur with a 10 percent chance of earning $1 million in a given year and a 90 percent chance of earning nothing that year. Their average annual incomes are the same, but a highly progressive tax will make the entrepreneur's expected after-tax income much lower than the salaried worker's.

Posted by Greg Galant on Dec 19, 2006 | Permalink | Comments (1) | TrackBack (0)

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Great post. I think another thing that many politicians, pundits, and other non-entrepreneurs fail to take into consideration is the fact that most enterprises don't have immediate cash flow. As a business broker, I see a lot of businesses where during the first 2-4 years there is little cash flow, and that the level of that cash flow is frequently far less than what the entrepreneur would have been able to draw as a salary working for someone else. The politicians and pundits also often fail to take into consideration that part of the compensation that an entrepreneur receives is for a return on capital invested - it's not the same as going to work for a business where the employee has nothing invested. For most entrepreneurs there is a give first, then receive mentality. For most employees it is the opposite: receive first (a regular paycheck), then give.

Posted by: Eric Williams at March 31, 2009 12:39 PM

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