NCPA - National Center for Policy Analysis

Tax Incentives For New Businesses

September 23, 2002

According to observers, the White House is looking for a tax cut proposal that would help the economy without widening the deficit. One plan fits the bill: tax incentives aimed at people who want to start businesses over the next two or three years.

  • The first two years for these small, entrepreneurial start-ups would be tax free.
  • The third and fourth years would be taxed at half the normal corporate rate -- and any stock sold by employees, founders or owners during the first two years would be taxed at half the normal capital gains rate.
  • The plan wouldn't contribute much to the deficit because most start-ups don't make much money in the first couple of years any way, and wouldn't be contributing much in corporate taxes.
  • Yet they would -- on their own and without any added incentives or requirements -- create new jobs and new individual taxpayers.

As for worries that the cut in capital gains will reduce revenues, after the rate was lowered to 20 percent in 1981, revenue from that source averaged $254 billion a year. After 1987, when it was hiked back to 28 percent, that revenue averaged $100 billion less.

From a political standpoint, the plan is also a winner. In targeting new businesses started up by "little guys" it will avoid charges that it is tax break for the rich or corporate welfare. All that's needed are safeguards to make sure existing businesses don't use the plan as an opportunity to shelter income by transferring assets from existing firms to new ones, observers say.

Source: Editorial, "The Way Out," Investor's Business Daily, September 23, 2002.


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