For many, becoming a small business owner has always been a part of the American Dream and for entrepreneurs launching a successful startup today is, in many ways, the 21st-century version of this ambition. But even if the business gets off the ground, it is becoming more and more challenging for company owners to scale up.
To put it in perspective, “young” businesses — 6 to 10 years — were half as likely to employ 1,000 workers or more in 2014 compared to 20 years ago. That’s based on an analysis of Census Bureau data in research released this month from the Progressive Policy Institute and Allied for Startups.
Large companies have been blamed for acquiring small companies before they can grow. However, there’s another explanation for the scaling-up trap that deserves more attention: the unintentional tax and regulatory cliff created by decades of policies favoring small businesses.
In the United States, small businesses are often exempt from obligations to provide certain employee benefits and comply with certain regulatory rules if the company is small enough. While these “carve-outs” are beneficial for companies who stay below the relevant thresholds, the threat of losing these exemptions can make entrepreneurs think twice before expanding. In fact, sometimes, selling small businesses to larger rivals is more lucrative for owners than scaling their own businesses.
In order for our startup ecosystem to grow, it is vital we create policies that help small companies flourish into larger employers. That’s why we are calling on policymakers, in both the United States and European Union, to establish a Startup Tax Credit that would be structured to support small businesses while they continue to scale. The tax credit — refundable against income taxes, payroll taxes in the United States, or value-added taxes in Europe — would rise to a maximum level as a small business expanded and then, would gradually phase out as the business expanded further. While this tax credit wouldn’t be a perfect fix, it would ultimately encourage small businesses to grow.
Not only would a Startup Tax Credit be good for business, but it would also be a big boost to the economy, creating jobs and spreading wealth across our societies. It’s clear that as our policy currently stands, small business owners are faced with a difficult decision when deciding whether to scale up. In order to help startups succeed and, in turn, boost local economies, developing the Startup Tax Credit is the best place to start.