Successful Entrepreneur Tax Redux

After my post on this paper, Dr. Eren Inci, the author, sent me an email to clarify some of his arguments. It is reposted below, with his permission.

Hi, Rob,

Thank you very much for your comments that appeared in on my paper. I am glad that I get an immediate reaction to the paper. I just want to clarify couple of points.

The main focus of the paper is to underline that we should focus more on the quality of entrepreneurs rather than their number. In the recent years much of an attention has been put on insufficient entrepreneurial entry. However, the entrepreneurial capacity of an economy is generally determined by the scarce resources currently available in the economy and these resources do not change from today to tomorrow. Thus, entrepreneurial entry should be less of a concern as long as the scare resources are used in some economic activity.

The main problem in entrepreneurship is the quality problem. Some entrepreneurs have better entrepreneurial abilities, some do not. Moreover, we do not know exactly who has better abilities, who does not. Then, the question is how we can improve the average quality of entrepreneurs in the economy, and thus, improve the performance of the economy WITHOUT EVEN KNOWING who has better entrepreneurial abilities. It turns out that, in some economies, this can be done with a wage subsidy financed by a tax on entrepreneurs. However, in some other economies, a reverse policy (i.e.; subsidizing entrepreneurs) is needed, which you missed. So, what I claim is not that we should tax entrepreneurs under every condition.

Suppose we are in an economy in which economic efficiency requires taxing entrepreneurs. If the government gives subsidies to entrepreneurs to induce entrepreneurial entry (which is the common practice in many economies) things will become worse. Low quality entrepreneurs will be tempted to become entrepreneurs. They will borrow some money from the bank which could have alternatively gone to a high quality entrepreneur and used in a better way. This is nothing but wasting the scarce resources we have in the economy.

I look forward to reading the responses of the other readers.

Best Wishes,

PS: You might be interested in my recent paper entitled "Success Breeds Success Locally: A Tale of Incubator Firms", too, which highlights the importance of networks for start-ups in overcoming the stigma of failure.

The paper he refers to in the PS is here.

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