My Take – An Incentive to Open and Close With Haste – Freakonomics – Opinion – New York Times Blog

I’ve always felt that the volume of businesses that get started is lower than it should be. It seems just nont as optimal, especially in my country where there is are no social safety nets. Lower the bar for starting and then gradually phasing them out I think is a push in the right direction.

October 2, 2008, 9:44 am

An Incentive to Open and Close With Haste

By Daniel Hamermesh


Before going to a Thai restaurant near my German apartment, I asked a long-time resident how it is, and she said it’s brand new. It was a Texas barbecue (!!) joint for a few months, and something else before that.

Why the turnover? Of course, being unable to cover variable costs matters generally, as always; but the German government apparently gives a small business an incentive to open up, and an incentive to close quickly if it cannot cover its costs: certain taxes are waived if the business is small, but only for a short period of time; thereafter, the tax break phases out.

Thus the risks of opening a new business are reduced; and, if the business is not very successful, the impending loss of the tax break provides an incentive to close it down within the time period necessary to escape these taxes.

I have grave doubts about this policy and about subsidizing small businesses generally: if there are scale economies naturally, why should the government try to offset them? And it’s hard to imagine that there are too few new small businesses — or that people are so unwilling to take risks that the government should offer subsidies.

I see no good economic rationale for these policies, but they are widespread in Germany — and in the U.S. too.

An Incentive to Open and Close With Haste – Freakonomics – Opinion – New York Times Blog.