How Entrepreneurs and Low Taxes Create Economic Growth

Entrepreneurs + Risk Capital + Low Taxes = Economic Growth

For nearly every entrepreneur, access to private equity capital, or risk capital, is a key ingredient to successful business growth. For a business to grow it needs to be nurtured in an environment that supports entrepreneurial capitalism.

“Capital is like oil; it’s stored energy. It’s the fruits of someone else’s labor ready to be put into play in businesses.”
– Alfred R. Berkeley III, NASDAQ

Frank Knight, a professor of economics at Chicago in 1928, wrote in Uncertainty and Profits, “The only risk which leads to a profit is a unique uncertainty. Profits arise out of the inherent, absolute unpredictability of things.” For nearly every entrepreneur, access to private equity capital, or risk capital, is a key ingredient to successful business growth. In the broadest understanding of the stratification of capital, risk capital is money for investment in innovative enterprises or research in which both the risk of loss and the potential for profit may be considerable.

We use the terms risk capital and private equity to refer to the universe of that asset class—which includes angel investments, venture capital, leveraged buyout, and mezzanine financing—that make direct capital investments in high-growth potential ventures. The one element that binds this diverse group of investors is that they receive some type of equity or stock vehicle when they put money into a venture.

Definition of entrepreneurial capitalism: private capital, investing in private start-ups, with potential for a viable harvest

Entrepreneurship, combined with support from venture capital, is a major force driving economic growth in the United States. Thomas McConnell of New Enterprise Associates once said, “Venture capital investment is a national phenomenon that helps set the U.S. economy apart from others in the world.” Venture capital financed groundbreaking research and untold improvements in infrastructure and technology. The average venture-backed company employs nearly 100 workers within five years and creates almost twice as many jobs as their nonventure-backed competitors.

Venture capital, risk capital, was perfected in the Reagan era with the help from Jack Kemp. Things changed with President Ronald Reagan’s election in 1980, when the business environment shifted from President Carter’s “Days of Malaise” as the Republicans produced political leaders committed to entrepreneurial capitalism. Their thrust took shape under “supply-side economics,” which was first envisioned by economic adviser Dr. Arthur Laffer. His winning thesis was simply this: Lower the marginal tax rates. He believed that individuals should keep more of their hard-earned money, which would encourage them to make more.

“Does government create jobs, or do entrepreneurs? Does government spending spur growth, or do lower taxes, less regulation, and spending limits? Can government direct investment better than the private sector? The answers to these questions provide the keys to designing a strategy for long-term growth in America.”
– Jack Kemp

In August 1981, less than seven months after being sworn in, President Reagan signed the Kemp-Roth bill into law. It was the cornerstone of what would become the most successful economic policy for new business venturing in U.S. history. The bill’s treatment of capital gains, a lowering of the top capital gains tax rate from 28 percent to 20 percent, made high risk investments even more attractive, causing a twofold increase in commitments to venture capital funds in 1981.

Entrepreneurs then launched a boom that would last, except for a brief eight months following the Gulf War in 1991, until the end of the twentieth century. It was the longest period of economic expansion in the nation’s history. Between 1983 and 2003, the Dow Jones Industrial average provided an annual return of 11 percent. For comparison, between 1965 and 1983 its annual return was 1 percent.

According to the U.S. Department of Labor Non-Farm Employment Data, the American economy generated over 27 million new jobs between 1980 and 1995. Over 24 million of these new jobs were created by small- and medium-size entrepreneurs operating high-growth ventures. As Dr. Laffer predicted, even Washington, D.C., prospered well, with the U.S. Treasury revenues increasing 28 percent to more than $1 trillion in 1990.

At the closing of the last century, MIT economist Lester Thurow had this to say: “In what will come to be seen as the third industrial revolution, new technological opportunities are creating fortunes faster than ever before. The United States has created more billionaires in the past fifteen years than in its previous history—even correcting for inflation and changes in average per capita gross domestic product.”

Jack Kemp Champion of Entrepreneurial Capitalism

When Ronald Reagan took the oath of office on January 20, 1981, the country was experiencing some of bleakest economic times since the Depression. The American dream had been restored with the help from Jack Kemp.

“Other than President Ronald Reagan himself, few people in the political world have had more influence on the last quarter century of wealth creation and rising levels of entrepreneurial business expansion than Jack F. Kemp.”
– Steve Forbes

The quarterback-turned-politician died of cancer at age 73 in 2009, was remembered for his commitment to free-market principles that transformed the world in the 1980’s. Kemp was an early influence, along with economist Arthur Laffer and President Ronald Reagan, in getting the Republican Party to embrace the philosophy of tax cuts. Republican Sen. Robert Dole’s selection of Kemp as his running mate in the 1996 presidential election reaffirmed Kemp’s imprint on GOP economic policy.

Jack Kemp in His Own Words

“It was this economy, triggered by President Reagan’s supply-side revolution of tax cuts in 1981 that generated 21.5 million new jobs, more than four million new businesses, relatively low inflation and higher standards of living for most people. This economy has created more jobs in the past decade than all of Europe, Canada and Japan combined. And according to the U.S. Treasury, federal income taxes paid by the top 1% of taxpayers has surged by more than 80% to $92 billion in 1987 from $51 billion in 1981.”

“In my opinion, people of all colors and income levels don’t hate the rich. They want to get rich. They’re more interested in generating wealth than they are in redistributing wealth. They want to own property, educate their children and build a nest egg that can be passed on to their heirs. Unfortunately, some aren’t able to access the same ladder of opportunity that is so readily available to the majority. . . .”

“By giving people access to capital and allowing them to take ownership of assets, entrepreneurship will be encouraged and the cycle of poverty can begin to be broken. All persons should have the opportunity to go as high as their merit and determination can carry them.”

“My favorite quote is from Abraham Lincoln, who said, ‘I don’t believe in a law to prevent a man from getting rich; it would do more harm than good. So while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else.’ Lincoln’s definition of entrepreneurial capitalism is the best I have ever heard.”

Rising Tide Lifts all Boats

Around the world economic policy advisors are working to find solutions to the chronic unemployment and stifling lack of economic growth. For creating the environment for entrepreneurial capitalism to flourish they should look at success of the 1980’s that was first framed by President John F. Kennedy and put into practice by President Ronald Reagan.

President Reagan’s Radio Address to the Nation on Martin Luther King, Jr., and Black Americans on January 18, 1986. “Now, none of this happened by accident. The economy is expanding because from the beginning we made it clear that one of the prime motivating intentions of this administration was to get the economy going again. And it was clear the way to do that was cut tax rates, stop penalizing initiative, and sit back and watch the fireworks. All of us have benefited. The poverty statistics show John Kennedy was right when he said, following his own tax cuts, a rising tide lifts all boats.”

SOURCES:  Roadmap To Entrepreneurial Success, Mises.org, Amazon.com
PHOTO: Reagan Library, Hoover Institution
IMAGE: PC.BlogSpot.com