There is a discussion going on over at Bill Hobbs' blog that warrants some attention within the context of entrepreneurship. Professor Antler of Roosevelt University has theorized that tax cuts actually lead to increases in the unemployment rate. Not because they are a sinister force at work in our economy, but as an artifact of how we measure unemployment.
The logic behind this assertion is that tax cuts increase real wages, thus making entry back into the work force more appealing. More people decide to actively look for jobs, which leads to the temporary increase in the measured rate of unemployment (those actively looking for work). An interesting idea, but one for which at this point there is no empirical evidence.
If it is true, I believe one could infer that there is a similar phenomenon at work for entrepreneurs. Tax cuts create more potential, or at least perceived potential, for real wealth for entrepreneurs since most entrepreneurs choose legal forms for their companies that tax them at the personal rate (i.e., S-corp, LLC, sole proprietorship, or partnership). That is, the potential risk for becoming an entrepreneur is off-set by higher returns due to the lower tax rates.
Antler?s Theory then comes into play. The government does not measure those creating new businesses among the employed. In a recent post I noted that when those working as independent consultants and start-up entrepreneurs are added into the job statistics the number of new jobs increased ten fold!
Let?s assume that Sally, who was laid off from her management position six months ago, has now decided that the time is finally right to start the business she has been researching. The economy is up and tax rates are down. Even though she is actively starting and even operating her new venture, the government still counts her as unemployed according to their standard measurements that get reported in the media. She doesn?t see it that way, and if included in part of the more accurate household survey of employment, she would say she is actively working. But not according to this widely reported statistic. Antler?s Theory at work.
I look forward to keeping up with this idea, and hope that someone can begin to find empirical evidence of this phenomenon. Stay tuned.
