Page 268 - ENTREPRENEURSHIP Innovation and entrepreneurship

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Conclusion: The Entrepreneurial Society 261

What is needed in an entrepreneurial society is a tax system that
encourages moving capital from yesterday into tomorrow rather than
one that, like our present one, prevents and penalizes it.
But we also should be able in and through the tax system to
assuage the most pressing financial problem of the new and grow-
ing business: cash shortage. One way might be acceptance of eco-
nomic reality: during the first five or six years of the life of a new,
and particularly of a growing, business, “profits” are an accounting
fiction. During these years the costs of staying in business are
always—and almost by definition—larger for a new venture than
the surplus from yesterday’s operations (that is, the excess of cur-
rent income over yesterday’s costs). This means in effect that a new
and growing venture always has to invest every penny of operating
surplus to stay alive; usually, especially if growing fast, it has to
invest a good deal more than it can possibly hope to produce as
“current surplus” (that is, as “profit”) in its current accounts. For
the first few years of its life the new and growing venture—
whether standing by itself or part of an existing enterprise—should
therefore be exempt from income taxes, for the same reason for
which we do not expect a small and rapidly growing child to pro-
duce a “surplus” that supports a grown-up. And taxes are the means
by which a producer supports somebody else—namely, a nonpro-
ducer. By the way, exempting the new venture from taxation until
it has “grown up” would almost certainly in the end produce a sub-
stantially higher tax yield.
If this, however, is deemed too “radical,” the new venture should at
least be able to postpone paying taxes on the so-called profits of its
infant years. It should be able to retain the cash until it is past the peri-
od of acute cash-flow pressure, and to do so without penalty or interest
charges.
All together, an entrepreneurial society and economy require tax
policies that encourage the formation of capital.
Surely one “secret” of the Japanese is their officially encouraged
“tax evasion” on capital formation. Legally a Japanese adult is allowed
one medium-sized savings account the interest on which is tax-exempt.
Actually Japan has five times as many such accounts as there are people
in the country, children and minors included. This is, of course, a “scan-
dal” against which newspapers and politicians rail regularly. But the
Japanese are very careful not to do anything to “stop the abuse.” As a
result they have the world’s highest rate of capital formation. This may