Startup Act Proposal Looks To Jump Start Economy

On the heels of the recent dismal unemployment report and data showing that new firms are growing slower and staying smaller, the Kauffman Foundation presented a collection of broad policy recommendations last week at the National Press Club in Washington.

The Startup Act is a narrowly targeted but comprehensive set of ideas aimed at jump-starting the U.S. economy through more successful startups. The proposal features recommendations grounded in research from the Kauffman Foundation and emphasizes that a strong, sustained economic recovery in the United States will require more high-growth companies, a continuing stream of new ideas capable of being commercialized, fewer roadblocks to launch and grow startups, and low-cost capital available to finance them.

Ted Zoller, vice president of entrepreneurship at the Kauffman Foundation, highlighted four of the proposals during his testimony last week before the Senate Committee on Banking, Housing and Urban Affairs. At a hearing titled “Access to Capital: Fostering Job Creation and Innovation Through High-Growth Startups,” he concluded with the following recommendations from the Startup Act:

  • First, modifying the tax code to facilitate the financing of small business, with a permanent capital gains exemption on investments in start-ups held for at least five years. There is a strong case, given the job creation and innovation benefits of start-ups, for exempting from any capital gains tax patient investing in early stage companies—an idea supported by the National Advisory Council on Innovation and Entrepreneurship.
  • Second, reducing corporate tax burdens for new companies in the first three years they have taxable income. To ease the pressure on start-ups precipitated by the J-curve and initial cash flow, the National Advisory Council has also suggested a full exclusion on corporate taxable income earned by qualified small business on the first year of taxable profit, followed by a 50 percent exclusion in the subsequent two years—an idea our research would support.
  • Third, making it easier for growing private companies to go public, allow shareholders who invest in firms with a market cap of $1 billion or less and are in the best position to judge the cost-benefit of financial auditing mandates to decide whether to comply with the requirements of the Sarbanes-Oxley Act. If the IPO window is opened, investors will be a lot more willing to finance early stage companies and their continued growth when those companies have at least the option of going public after they have reached scale, rather than simply selling out to a large firm, thereby retaining the entrepreneurial energy of the scale enterprise as a long-term business venture and employer.
  • Fourth, reforming federal regulation by sunsetting all major rules after 10 years, requiring all new major rules to pass a benefit-cost test, and collecting data on regulation at the state and local levels to allow for the objective evaluation of how regions can promote business-friendly climates.

The nonpartisan proposal was presented by Carl Schramm, president and CEO of the Kauffman Foundation, and Robert Litan, Kauffman’s vice president of research and policy, followed by videotaped remarks by House Majority Leader Eric Cantor (R-VA) and Senator Jon Tester (D-MT).

This article was written by Mark Marich on July 25, 2011 and originally posted on the Policy Dialogue on Entrepreneurship.