I write a lot about entrepreneurship. This is not because I think everyone should be an entrepreneur. For one thing, not everyone wants to be an entrepreneur, and part of having an economy that works for everyone means making room for folks who just want to show up at work and do their job.
The problem with our current system of social and economic organization is that we’ve swung too far in the other direction: entrepreneurship is so maddeningly difficult that folks who would be better off starting their own business remain as employees, both occupying jobs that would be better filled by folks who want jobs, while also not pursuing their own goals.
But it’s easy to complain. Instead, I want to share my actual, concrete, actionable vision for what a culture of entrepreneurs and entrepreneurship would look like.
Simplify the tax code
Self-employed people and entrepreneurs don’t talk as much as they should about the complexity of the tax code because once you’re self-employed you’ve almost by definition figured out the tax code. It takes me perhaps half an hour to do my taxes these days, because they’re basically the same every year.
That’s unfortunate, because it means people aren’t talking about the initial hurdle of figuring out how the tax code applies to entrepreneurs. The half hour my taxes take me today is the product of hundreds of hours of poring through tax schedules to figure out how all the pieces fit together.
Fortunately, the answer’s simple:
- tax capital gains as ordinary income;
- eliminate the floor and ceiling on FICA taxes;
- eliminate the 20% pass-through income deduction introduced in the smash-and-grab tax reform bill of 2017.
Obviously running a business will never be exactly the same as being an employee. But if you use the basic idea of adding up all your income each year and paying taxes on the resulting number as the core principle of the tax code, we can demolish an enormous hurdle to entrepreneurship.
Eliminate (tax preferences for) workplace health and retirement benefits
I’ve never pretended to have all the answers; I don’t know how much money people should be able to shield in tax-advantaged retirement accounts. My gut feeling says the number should be $0, but whatever amount you think they should be able to shield in tax-advantaged retirement accounts, there’s obviously no reason that number should depend on their employer.
- If the number is $5,500 (the limit on individual retirement account contributions), then the number should be $5,500 for everyone.
- If the number is $24,000 ($5,500 in IRA contributions and $18,500 in employee-side 401(k) contributions), then the number should be $24,000 for everyone.
- And if the number is a full $60,500 ($5,500 in IRA contributions, $18,500 in employee 401(k) contributions, and $36,500 in employer 401(k) contributions), then the number should be $60,500 for everyone.
To be clear, since this is an area where people tend to develop some very strange ideas, your employer’s contribution to your workplace retirement plan is part of your labor income; it’s not a gift and it’s not done from the generosity of their heart. Even if you believe that there should be tax advantages to contributing to investment accounts that can only be tapped penalty-free in old age, there’s no reason to believe that the investment management company, investment options, and fees should be determined by your employer, instead of by you.
Meanwhile, eliminating the exclusion from personal income of workplace health insurance benefits would almost immediately end the disastrous American experiment with employer health insurance plans, and keep every business in America from having to run a small, terrible health insurance company on the side.
Make hiring easy
There was a period in the late 90’s when it was fashionable to attack and vilify political candidates who hired landscapers, housekeepers, or nannies “under the table,” the idea being that they were either facilitating undocumented immigration or saving money on the taxes they’d owe if they were operating on the level.
This is bullshit. It is not, in fact, possible to hire someone to work legally in the United States. Don’t believe me? Just try it!
I’ve written before about E-Verify, which doesn’t work, but E-Verify isn’t mandatory, so set that aside.
It’s impossible to comply with US and state employment laws. Now, it’s true that you can pay someone to handle payroll for you, but that means the hurdle to hiring an employee is not “is this employee going to produce more value than they cost?” but rather “is this employee going to produce more value than they cost plus the cost of hiring them?” The lower we can make that extra drag, the easier businesses will find it to expand and hire.
The obvious way to deal with the information asymmetry between employers and the IRS is for the IRS to design a single interface that calculates federal, state, and FICA tax withholding and accepts payment for those taxes.
The fact that we haven’t done so is the most striking proof that we don’t take entrepreneurship seriously.
Eliminate means testing and (paper)work requirements
A non-exhaustive list of big national welfare benefits:
- the Earned Income Credit
- the Retirement Savings Contribution Credit
- the Child Tax Credit
- Supplemental Nutrition Assistance Program
- Women, Infants, and Children
- Low-income Heating Energy Assistance Program
These programs all have different requirements, each of which has to be documented, and which can push in different directions.
- They all require you to have a low income. What qualifies as a low income depends on the program, however: in Medicaid-expansion states “low-income” means up to 138% of the poverty line, or $16,146. Meanwhile, the EIC is phased out completely at $15,000 in earned income, and the CTC at $240,000 in adjusted gross income.
- But not too low! The same programs also have minimum income requirements. SNAP requires recipients to work 20 hours per week; the RSCC can only be credited against taxes owed, meaning recipients have to have more income than their standard deduction; and only $1,400 of the new CTC is refundable, so $600 of the credit is reserved for folks with income high enough to owe at least that amount in tax (but less than the phaseout amount, remember).
This means someone’s disposable income is dependent on their income from work, but not in a coherent or dependable way. It’s impossible to guess whether an additional dollar of income will actually raise your disposable income, or whether it will reduce your welfare benefits by more than a dollar.
The obvious answer is to replace all the cash-like welfare programs with a universal basic income (per adult) and child allowance (per child), and pay for the higher costs with higher marginal tax rates on higher incomes. This would act as the same “phase-out” the designers of welfare programs are so enamored with, but through the simple mechanism of a progressive income tax instead of having to calculate the phase-in and phase-out points of dozens of different benefits.
In this way, earning a dollar of extra income will still not increase your disposable income by a dollar, since it will be reduced by the taxes owed, but it won’t be reduced again by the loss of eligibility for multiple interlocking welfare programs.
One of the most destructive, counterproductive tendencies in American life is to talk about entrepreneurship as something other people do. Whether it’s venture capitalists in Silicon Valley or restauranteurs in Brooklyn, we hear that it takes a special kind of person, willing to work 20 hour days, spend Christmas at the office, and never see their family in order to finally hit the jackpot when their vision is realized.
But when I say “entrepreneur,” I mean the stay-at-home dad who screenprints t-shirts when the kids are napping. I don’t care if he ever turns the business into a global conglomerate, I just want to make his life as easy as possible so he can get back to work on the t-shirts.
We were not put on Earth to fill out paperwork.