Using tax incentives to bring in job creating businesses is popular with Jacksonville city government. From September 1998 to August 2009, the Jacksonville Economic Development Commission (JEDC) claims that it created 6,444 new jobs according to a list of JEDC “job generating projects” provided to the Concerned Taxpayers of Duval County. Well, that sounds impressive, right? Sure, you could point out that it is not clear whether these jobs would have been generated anyway without incentives. But if the JEDC had anything to do with the new jobs, then tax incentives for job creation sounds like a great deal!
Not so fast! A recent study appearing in the Harvard Business Review suggests that the secret to job growth is not in doling out tax breaks to big employers in an attempt to entice them to move to your city. If anything, cities with a lot of smaller firms tend to have higher job growth than cities with only a few large firms. Having a business environment that promotes entrepreneurship by reducing business startup and other small business costs imposed by the government is a far better way to improve the job situation in a city than tax incentives to larger established firms.
The benefits are not only in job creation, but also in product innovation. In the book From Poverty to Prosperity written by Arnold Kling and Nick Shulz, the authors argue that innovation does not tend to originate from established firms, but from entrepreneurs risking everything on a novel idea. Established firms tend to be more conservative in their risk taking than entrepreneurs, but risk taking is essential for innovation. So lots of entrepreneurs with big dreams lead to a lot more great ideas for goods and services that improve our lives.
I am sure that some government official is reading this and saying to himself “Maybe, we should increase the corporate welfare that is going to small businesses and entrepreneurs!”. And he would be missing the point! The best thing that the government can do is to provide the essential government services that cannot be provided by the free market and then get out of the way!
Here is one way for government to get out of the way of entrepreneurs. When monks tried to sell simple coffins in Louisiana, the State Board of Embalmers and Funeral Directors threatened them with fines and jail time. Their crime? Not being part of the funeral parlor cartel that uses the government to protect itself from competition. The free market does not need government help to weed out the entrepreneurs who do not provide anything of value to their customers that they cannot already find cheaper and better elsewhere.
