Don’t Chase Entrepreneurs from the Marketplace

by Burt on December 6, 2012

In response to the idea of trying to tax internet sales, Patrick Byrne, the CEO of Overstock.com, said this: “Politicians have to remember that a tax is a price that government charges for a service, and when they raise their prices, we’re going to buy less of their services.” Well put.

We can go further and note that when tax rates go up, entrepreneurship goes down. In the 1920s, for example, when Presidents Harding and Coolidge encouraged lower tax rates for Americans, tax rates were cut to 25 percent on top incomes during that decade. Entrepreneurs knew they could keep the bulk of what they produced, and the United States experienced robust economic development and job creation.

For example, the invention and development of radio changed the way in which people were entertained and how they communicated. In that decade we also saw other inventions from sliced bread to scotch tape. Air conditioning got its boost in the 1920s–from the movie industry interestingly. Before air-conditioning, the owners of movie theaters knew that attendance dropped during summer months. Patrons just didn’t want to sit in hot movie theaters. However, when theaters began using air-conditioning to keep their customers comfortable, attendance during hot weather actually sky-rocketed as people flocked to sit in the comfort of a cool theater on a hot day.

What about the 1930s? In that decade, tax rates were first raised to a top marginal rate of 63 percent in 1932 and then to 79 percent in 1935. When entrepreneurs were told they would have to give most of what they earned to the government, we saw a sharp fall in inventions and economic development. It’s hard to think of a single key invention that took place in the 1930s. President Roosevelt railed against the “malefactors of wealth,” but in truth he chased them from the marketplace.

Will inventiveness in the coming decade resemble that of the 1920s or 1930s?

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