Why Are So Few Millennials Entrepreneurs? by Zachary Slayback, Foundation For Economic Education
Schooling and government policy have stifled the spirit of enterprise among the young
There’s a popular trope right now that a ton of young people are founders and entrepreneurs. Thanks to a handful of young founders with a disproportionate impact (ala Mark Zuckerberg) and cultural figures like HBO’s Silicon Valley, you can easily trick yourself into believing that entrepreneurship is all the craze among young people. Hacker meetups, entrepreneurship clubs and majors on college campuses, and the sudden growth of incubators and accelerator programs can present some sexy fodder for this case.
But this is all misleading. Entrepreneurship among young people is actually relatively uncommon. Relatively few young people today own stock in a private company — and a good chunk of those who do likely aren’t entrepreneurs anyway, but rather work for companies who issue equity to their employees.
According to the Wall Street Journal (behind a paywall, google the title to gain access to the article), the percentage of young Americans who are entrepreneurs dipped to less than 4% in 2015:
Roughly 3.6% of households headed by adults younger than 30 owned stakes in private companies, according to an analysis by The Wall Street Journal of recently released Federal Reserve data from 2013. That compares with 10.6% in 1989—when the central bank began collecting standard data on Americans’ incomes and net worth—and 6.1% in 2010.
The Journal offers a couple of hypotheses as to what is behind the dip in entrepreneurship among young people, including stiffer competition in the age of the Internet, lower savings rates among young people in the aftermath of the recession, a decreased appetite for risk, and changes in bank lending policies. These all are possible contributing factors, but I suspect that formal institutions play a larger role in the decline in business ownership.
Between local, state, and federal regulations placed on everything from who is allowed to braid hair to who can tell you what color to paint a wall and where to place a door and a schooling culture and system that encourages young people to waste away the first 22-30 years of their lives away from the market, the systems placed upon young people today create a climate extremely hostile to entrepreneurship and economic growth.
Regulated To Economic Death
Americans today are the most regulated and taxed in the country’s history. While some tax rates have dropped in recent years, they’ve been offset by increases elsewhere and the unprecedented and massive growth in the bureaucracy. It’s harder today to simply start a business because of the number of regulations with which one must comply. It was once possible to start a business whenever you realized you were on to something that solved problems for people and for which they would pay you, but the immense regulation of small businesses today makes the barrier to entry so much higher that plucky young upstarts are much less likely to be able to get off the ground.
A few decades ago, Tina may have started a small salon out of her basement when she realized that she had a knack for designing nice and fun haircuts for her friends and family and also realized that this could earn her some extra money for her kids. She’d clear some space away in the basement, put up a sign advertising her service, and even have her nephew man the front desk as business picked up. Not so today. Today, she’d have to pass a number of boards and certifying examinations saying that she is qualified to provide this service (never mind if customers thought she was qualified — it was her competitors who would judge her boards and exams), get a commercial license from her local government, incorporate as a business, get a federal EIN for tax purposes, buy a regulation-friendly sign, and hire staff at a much higher price than her nephew was willing to do the work. And that’s just to get off the ground and get started.
Is it any wonder that Tina doesn’t go into business today?
One of the most nefarious taxation schemes to small business and entrepreneurial growth is the capital gains tax. Used in this election cycle to refer to taxes on “hedge fund managers” (a boogeyman of choice in Election 2016), the capital gains tax is, simply put, the tax on gains from investments. This applies to all sorts of investments, not just millions of dollars made from trading in some dark room like in The Wolf of Wall Street. If you flip a house, you have to pay a capital gains tax. If you invest in commodities (i.e., oil, gold, silver, sugar, copper), you have to pay a capital gains tax. If you start a business that issues dividends, you have to pay a capital gains tax.
Most investments (including launching a small business) come with a certain level of risk and are only made if the would-be investor can expect a minimal growth on the payout. If they know that half of their profits are going to be taxed away by the feds and the state government, many people will decide to forego the investment in the first place. Why work twice as hard at creating a profitable business so that you can keep just as much (if not less!) than a waged job would provide?
I have a good friend who flipped a house when he was 16 years old. He and a few friends put all the money they had saved up together to buy an old house. With a loan from the bank, they owned the house and renovated it heavily. They ended up selling it for a 3x ROI. By the time the state and federal taxes were through, they each received a few thousand dollars over their initial investment. At that point, it would have been wiser to go work at McDonald’s for a year rather than work on the house.
People invest less when they know that more of their returns will be taken from them.
If you have to pay an income tax and a capital gains tax on everything that you worked so hard to build as a small businessperson, what incentive remains to start in the first place? Sure, there are stories about being the one in charge of your work and how good that feels, but you have to pay your bills at the end of the day. Young people know this too well after years of little-to-no financial education and then seeing the FICA taxes on their paychecks the first few times.
Occupational Licensure and Cost Of Working
It’s not uncommon to have to pass tests in certain states in order to do your trade. If you’re a doctor or an airline pilot, this might make intuitive sense. But what about a florist? Or a hair braider? An interior designer? How about these 102 lower-income occupations?
Defenders of occupational licensure will usually find fringe cases where being “properly qualified” to do a job would have supposedly prevented a negative outcome or will point to