It's good to get rich, so let's abandon the politics of envy

`Mr Brown needs to make it plain that he'd like everybody in Britain to want to be a millionaire'
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The Independent Culture
ENTERPRISE IS a quality that governments of all stripes, everywhere, feel they have to do something to boost. Gordon Brown will be no exception when he makes his pre-Budget statement in the House of Commons this afternoon. Enterprise will be a dominant theme.

This is rather bizarre when you think about it - after all, why should anything announced by the mandarins in Whitehall encourage people to take the highly individual and risky decision to set up a new business? There is something inherently paradoxical about the idea, like centrally planned individualism.

Still, if any measures to create new businesses and increase investment were ultimately to boost the economy's productivity growth, the reward would be high. Small increases in the annual rate of growth compound into huge improvements in living standards over the years. So it is scarcely surprising that the Chancellor, like so many of his predecessors, wants to give it a try.

Yesterday he announced that the UK would import directly a tiny bit of the American high-technology dynamo. The awe-inspiring Massachusetts Institute of Technology is to form a new institute for high-tech entrepreneurship at Cambridge University, with pounds 14m a year in Government funding. This follows last week's announcement by Mr Brown that, in another echo of the American model, small companies can give as many as 10 employees stock options worth up to pounds 100,000, free of income tax.

But these measures, and any further changes he announces this afternoon, will in fact do no more than create the right sort of mood music for entrepreneurship. Like most candlelit romantic dinners, they will just make people feel better about something they would have done anyway.

For in one sense there is no puzzle at all about what makes people set up a business. The number of start-up companies rises when the economy expands, and falls when it turns down. Enterprise thrives in booms and dies in recessions. The bigger the boom, the more entrepreneurs it fosters.

This, rather than stock option schemes, low tax rates or even cultural influences, explains America's recent spectacular entrepreneurial success. The US economic boom is about to enter the record books as the longest period of expansion in history. No wonder so many people across the Atlantic feel confident that there will be a market for whatever it is that their new business is selling.

Even allowing for the economic cycle, however, the US leads the entrepreneurial pack. Yet it is hard to figure out exactly what drives the underlying level of enterprise. The British Venture Capital Association recently published research claiming that entrepreneurial activity in the US took off when the rate of capital gains tax was cut to a flat 20 per cent. The indications ahead of Mr Brown's speech today suggest that their lobbying has been successful, and that they will be rewarded with a reduction in the rate here.

However, it is extremely hard to disentangle the effects of that tax cut from the impact of the long economic boom on the number of new businesses formed in the US. There is no academic consensus about what sorts of tax incentives make a difference to the number of new businesses that are created - not least because governments are so prone to tinkering with the various taxes and incentive schemes for small businesses, that none of them lasts long enough to be assessed properly.

Research at Warwick University has turned up one influence that has little to do with the tax system. Access to capital, even quite small sums, encourages people to launch a business. Britain's financial system has been notoriously bad at generating finance for very small businesses. Too many of them fail, and commercial banks and venture capitalists alike prefer to put their money into safer bets. They will invest only in companies that have a longer trading record than a new start-up; the tadpoles have to rely on bank loans secured on their family homes, or even just an overdraft, if they have any outside money at all. Most start-ups rely on a small inheritance, family loans, or even a lump sum from a redundancy payment.

So a hint that today's pre-Budget statement will include a scheme to offer small grants for new businesses in certain areas makes a lot of sense. But further tax incentives are more questionable. Common sense suggests that as long as the tax burden is not obviously too onerous, the fine details are not going to have any impact at all.

As Professor Sue Birley, at Imperial College, puts it: "You've got to make profits to pay tax. The tax arrangements are the last thing on your mind when you're starting up a business." Even Mr Brown's scheme to save key executives tens of thousands of pounds in income tax on their share options will make no difference to people who are hoping to make millions from their enterprise.

There is only one reason why measures such as cutting capital gains tax or introducing lavish new share option schemes for hi-tech companies might matter. And that is in signalling that making lots of money is not only acceptable, but desirable.

For this is a real difference between the degree of entrepreneurship in the American economy and the British. In the US, people who get rich by building thriving new companies are admired for their contribution to the economy. There is no nuance of snobbery about it, no politics of envy. The Chancellor should use changes to the tax regime for business start-ups to signal that wealth is good; that people are welcome to try to get very rich by creating successful companies on this side of the ocean, too.

Too often in the past, unfortunately, tax incentives for entrepreneurs, announced with much fanfare, have incorporated all sorts of fussy limits because governments could not bear to forgo potential tax revenues. More fundamentally, they have all too often been ambivalent about the fact that there can be no wealth creation in an economy unless some individuals grow very wealthy indeed.

Ideally, of course, lots of people will become successful entrepreneurs. It is another breathtaking feature of the current US boom that the number of successful business ventures is so vast, with a new millionaire created every 10 minutes. The detail of the measures will be unimportant, but Mr Brown needs to make it plain in his pro-enterprise speech today that he'd like everybody in Britain to want to be a millionaire.