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Opinion: Helping start-up businesses: right idea, wrong mechanisms

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Politicians from both parties love to sing the praises of small business, no doubt recognizing that there are far more voters at small businesses than big ones (according to the Small Business Administration, ‘small’ firms represent 99.7% of all employers, and they employ half of all U.S. workers). It’s also true that, as a consequence of their advantage in numbers, small businesses create more jobs than big ones do.

So it’s not surprising that the Obama administration has repeatedly tried to reduce unemployment by offering help to small businesses -- typically in the form of grants and tax breaks. It offered its latest initiative Monday, dubbed Startup America, that focuses on entrepreneurs and new small businesses. That’s the right focus; as Tim Kane of the Kauffman Foundation put in it in a study last year, ‘[S]tartups aren’t everything when it comes to job growth. They’re the only thing.’

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The problem with the initiative, though, is that it falls into some of the usual traps that Washington stumbles into when it tries to make a difference in the economy. It offers targeted tax breaks that favor a particular kind of business organization -- the kind of tax-code complexity that encourages people to game the system -- and it funnels money toward a particular kind of industry favored by the administration, an approach that could yield a bunch of new businesses developing products and technologies they can’t sell.

I also wonder whether some of the efforts to subsidize U.S. entrepreneurs don’t violate international trade treaties -- particularly in light of the recent World Trade Organization ruling that research and development grants by NASA and the Pentagon constituted illegal subsidies for Boeing.

The targeted tax breaks include the elimination of capital gains taxes on the sale of qualified small-business stock held for more than five years. The spending programs include four ‘private business accelerators’ funded by the SBA and the Department of Energy for clean-energy start-ups, and a challenge grant program by the Commerce Department to promote ‘technology-led economic development in pursuit of a vibrant, innovative clean economy.’

Also on tap are two $1-billion SBA funds for investments in small businesses to supplement the capital they raise privately. One of the funds would make capital available to ‘early stage’ companies, matching dollar for dollar the money they raise from banks and private investors. If the grants are broadly available, then it’s merely a case of the government favoring start-ups in general, which isn’t necessarily a bad approach -- unless, of course, you don’t like the government owning any part of a private enterprise. But if the grants are aimed at businesses in particular fields, then they’ll look more like the government setting industrial policy.

The initiative is on safer ground when it seeks to make more capital available to entrepreneurs in areas overlooked by private investors, make it easier for start-ups to launch and enlist private industry’s help in promoting entrepreneurship. The most notable of the latter is the Startup America Foundation, which is aided by grants from the Kauffman Foundation and former AOL Time Warner chief Steve Case.

But the White House offered only a half-measure on the issue that many entrepreneurs say is the biggest impediment to their success: the ridiculous backlog of patent applications. The U.S. Patent and Trademark Office is developing a system to let entrepreneurs seek a faster review of their applications. A more direct solution would be to beef up the overworked patent office, giving it the staff needed to do more timely and thorough reviews. That kind of approach would probably deliver more bang for the buck to start-ups and the economy than a new set of tax breaks or targeted subsidies.

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Carl Schramm, president and chief executive of the Kauffman Foundation, and Case Foundation chief Steve Case speak in Washington at the launch of the Startup America campaign. Credit: Jim Young / Reuters

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