Monday, March 9, 2009

Manzi Responds


Jim responded to the taxes and entrepreneurship post in the comment section and then followed up with a post on the Corner:

The first of these at least attempts to make the argument from evidence. The author asserts that tax rates were higher under President Clinton than under President Bush, and there was a greater increase in net new businesses under President Clinton than under President Bush, so therefore my conclusion “just isn’t true.”

That oversimplifies my argument, but the data does show that if we have marginally higher taxes, they alone don't doom entrepreneurship in America as the article insinuates. That was my point. Continuing:
There are some problems with the analysis, but more fundamentally, with the logic.

First, the analytical problems. As the author notes, he is looking at “net increase in number of firms”, which is new formations less eliminations, so it does not actually capture new starts. I think that a much more direct analysis of this kind in regard to my assertion would be to compare government spending as a percentage of GDP (I referred in the article to current tax laws plus the rational expectation of future tax increases) to total dollars of new venture capital commitments (I described a venture-backed entrepreneur, and quoted the number of jobs created by venture-backed start-ups as evidence for the importance of the issue). I did this only as a response to some of these criticisms. You’ll find that there is a negative correlation with R-Squared of 0.28 between these two variables — that is, as government spending becomes a larger part of the economy, venture capital funding of businesses tends to drop.

Only that wasn't the only assertion he was making in the article. Edmund Phelps, who Manzi quotes, makes the argument that there is some correlation between an increase in government spending and a decrease in new venture funding. But Manzi quickly moves from that, to the effect of marginally higher taxes on an entrepreneur's willingness to make the leap. Furthermore, and Manzi admits this in his response, a 0.28 R-Squared is by no means conclusive (there are other lurking variables that explain the remaining 72% of variation).

He closes with:

I was carefully circumscribed about my claim:

Higher tax burdens raise the price of entrepreneurship. When you raise the price of something, then, all else held equal, you usually get less of it.

That is, I didn’t claim that we would have fewer new company formations in the next decade than we did in the last. I didn’t even claim that the net effect of the overall Obama political program would be positive or negative for entrepreneurs.

He certainly spent a lot of the article talking about how higher taxes would make someone less likely to start a business. And the title of the article is, "The Innovation Squelch: Obamanomics is bad news for American entrepreneurs", draw your own conclusions.


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