7 Ways to Help Entrepreneurs Help the Economy

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The most important challenge for entrepreneurs isn't starting a company, but growing it from three employees to 30 ... to 300, to 3,000. Small businesses, which account for 99.7 percent of firms and 64 percent of job creation, aren't hiring quickly enough to significantly lower the unemployment rate.

Let's start by thinking about the smallest firms. The companies of one. Self-employment is the new employment these days. Accounting for one-third of the workforce, the self-employed population is 40 million and growing. By the end of this decade, the Bureau of Labor Statistics predicts that 40 percent of the U.S. labor force will be self employed.

The self-employed can be a major force for job creation. But they need a push. There's been an uptick in start-ups since the recession; however the number of start-ups that hire in the first year declined before the recession, and it's still declining. More people are striking out on their own, but they're not hiring help.

How do we scale our start-ups? Here are seven ideas to boost entrepreneurship and help creative people move from starting a company to building a company.

IMMIGRATION REFORM

Twenty-five percent of successful tech start-ups are founded by immigrants. But every year, we kick out tens of thousands of immigrants after giving them a U.S. education. Instead, we should encourage them to stay by offering "entrepreneur class" visas to immigrants who start companies, ramp up revenues, take investments, and make hires. This plan costs nothing and creates jobs. So why aren't we doing it? Because expanding our visa program is bound up with controversial immigration reform.

FREE THE PROFESSORS!

Some of the country's most famous entrepreneurs are college drop-outs, but universities are petri dishes of innovation. Sixty percent of the U.S. government's $147 billion in research and development is sent directly to research universities. We need smart ideas about getting a return on that $90 billion investment. One idea from Robert Litan is to give faculty innovators the same freedom to choose their own licensing agent for their innovations. Today, if you're a faculty member with a great new idea that you want to license to IBM, you have to go through the university. This creates a bottleneck as the school's office is inundated with professors seeking credit for their ideas. "If professors acted like free agents, they could use anybody including their own lawyer to license their innovation," says Robert Litan, senior fellow economic studies at Brookings Institution, and vice president for research and policy at the Ewing Marion Kauffman Foundation. The university wouldn't lose money. It would still share revenue with the professor based on their existing contract. But freeing the professors would shorten the road from whiteboard to marketplace.

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TAX BREAKS FOR ANGEL INVESTORS

When politicians are talking about small businesses, they're often talking about taxes. Taxes matter, but not as much as Washington would like you to think. Bill Gates and Steve Jobs got started when the highest marginal tax rate was 70%. But where taxes really have an effect is in venture capital and angel capital. That's why the administration has floated the idea of having a zero capital gains rate for angel investments held for five years, or a 25 percent tax credit for angel investments made in firms receiving special innovation grants. Reward patient capital in start-ups could unclog small business investment.

MAKE FASTER ZONING LAW DECISIONS

For new restaurants and shops, zoning law can be the difference between the space you want and no space at all. Local and state governments relax their zoning laws and make decisions faster (say, in fewer than 30 days), Litan says.

KEEP REFORMING HEALTH CARE

We think of entrepreneurs as California kids wearing T-shirts on a garage computer. But the average age of high tech start ups isn't 25. It's 39. These are family men and women entering middle age when health care coverage is essential. That makes it risky to leave a big firm with government-sponsored health care premiums to strike out on your own. This is a serious impediment to new business formation. The exchanges in the new health care law will try to create a market for affordable insurance with subsidies. The new law is especially helpful for workers up to 400% of poverty. The next law could target the self-employed middle class.

CREATE A "COMMON APP" FOR ENTREPRENEURS

To streamline the legal process, there should be a single page on the federal government's website for filling in information to start a company. Like a Common Application for college, but for start up companies, entrepreneurs could enter the 50 or so pieces of information they need to start a firm, and states could read the information on the backend. Americans start roughly 500,000 new businesses every year, but there is no one-stop shop for entering all the relevant data about your company. "Come to think of it, somebodycould  probably start a company by building a one-stop shop for people trying to start a company," Litan told me.

EXTEND THE STIMULUS FOR THE SELF-EMPLOYED

The U.S. government should make permanent two measures it used to stimulate job creation among the self-employed, the National Association for the Self-Employed wrote in an email. First, it should extend the tax deduction on health insurance premiums for payroll tax purposes. Second, it should permanently increase the deduction for start-up businesses  from $5,000 to $10,000. Finally, the administration should set up the Small Business Lending Fund to provide capital for community banks and smaller lenders.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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