The Start-Up Act: Blueprint for an Innovation Recovery

Entrepreneurs are the real jobs engines. That means the only sensible jobs plan is one that helps start-ups grow into Fortune 500 companies. Here is that plan.

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The best way to promote innovation is to clear the way for the main agents of innovation: the entrepreneurs who create new businesses. Existing firms innovate, but their contributions are usually incremental -- improvements in existing products or production processes, or the introduction of new products through pursuit of well-established R&D agendas. When it comes to so-called discontinuous or disruptive innovation -- the kinds of breakthroughs that topple the status quo and give rise to whole new industries -- the catalysts of change tend to be new firms. Think FedEx, WalMart, Microsoft, and Google, all of which were upstarts without any stake in the existing way of doing things.

How to make life easier for innovative entrepreneurs? The Kauffman Foundation unveiled this past July a wide-ranging series of legislative proposals aimed at reducing barriers to new, potentially high-growth businesses. The package is called the Startup Act of 2011.

Where great ideas really come from. A special report

First on the list is expanding the number of entrepreneurs by importing them from abroad. America's universities attract brilliant, creative young people from around the world, but after they get their degrees they are all too often shown the door. This terrible waste of talent needs to end. Foreigners who graduate from U.S schools with STEM (science, technology, engineering, and math) degrees should be welcomed here with a green card stapled to their diplomas. In addition, visas should be granted to foreign entrepreneurs who commit to establishing a business here and hiring U.S. workers.

Foreigners graduating from schools with sci/tech/math degrees should get a green card stapled to their diplomas.

New, innovative businesses with potential for high growth routinely struggle for financing to get them through their early years. Tax incentives could be a useful means of easing these growing pains. The Small Business Jobs Act of 2010 currently provides an exemption from capital gains taxes for long-term investments in startups, but it is slated to expire at the beginning of 2012. The exemption ought to be made permanent, or at least extended until fundamental tax reform zeroes out exemptions generally in exchange for lower rates. Another good idea along similar lines is to offer a 100% exclusion on taxable income earned by qualified small businesses in their first year of taxable profitability, followed by a 50% exclusion for the subsequent two years.

Offering publicly traded stock allows growing businesses to tap into vast pools of capital to fund their expansion. And in a startup's early years, the prospect of going public is a major inducement for angel investors and venture capitalists to get on board. Accordingly, regulatory restrictions that reduce the attractions of going public act as an unintended brake on entrepreneurial innovation. And that is precisely what the Sarbanes-Oxley Act, passed in the wake of the Enron and other accounting scandals, has ended up doing. Recognizing this problem, Congress in 2010 exempted public companies valued at under $75 million from the onerous "Sarbox" Section 404 (which requires management to provide annual assessments of internal controls on financial reporting). More, however, needs to be done. Since the purpose of Sarbox is to protect shareholders, why not leave it to the shareholders themselves to determine whether the law's strictures are worth it to them? Specifically, shareholders of smaller public companies (with market capitalizations under $1 billion) should be allowed to opt out of Sarbox requirements; such companies could then bear special designations in their exchange listings so all future potential shareholders are on notice.

Presented by

Brink Lindsey is a senior fellow with the Cato Institute and the Ewing Marion Kauffman Foundation.

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