Why Supporting Entrepreneurs Is an Economic Growth Strategy

NEXT Missouri exists to advocate for policies that support entrepreneurship and innovation as ways to grow Missouri’s economy.

A recent working paper provides fresh evidence that entrepreneurs can be powerful engines of economic growth, with benefits that extend to workers and the broader economy.

Economists Myeongju Kim and Eunseong Ma of Yonsei University in South Korea studied whether changes in U.S. federal taxes had different economic effects depending on whether tax cuts were targeted toward entrepreneurs or wage workers.

They found that tax cuts benefiting entrepreneurs generated substantially larger increases in economic output, consumption, and employment than revenue-equivalent tax cuts benefiting workers.

The researchers also found that entrepreneur-targeted tax cuts coincided with increases in both entrepreneurship and wage employment, pointing to new business formation and firm expansion as important ways those tax cuts affect the broader economy.

From Tax Relief to Business Growth

Why might tax cuts for entrepreneurs have a larger economic effect?

The researchers note that entrepreneurs often face constraints on how much money they can borrow to start or grow a business. Those constraints can be especially burdensome for entrepreneurs with fewer financial resources, limiting their ability to invest.

Consistent with that explanation, the researchers found that the effects of tax cuts were greatest among what they call “non-rich” entrepreneurs—those with adjusted gross incomes in the bottom 90 percent.

When financial constraints suppress entrepreneurship, influxes of capital can enable investments that otherwise might not happen, allowing entrepreneurs to start businesses, expand operations, and hire workers. As these kinds of activities increase, effects can spread throughout the economy.

Implications for Public Policy

Missouri’s new Angel Investment Incentive, scheduled to launch in 2027, approaches the capital challenge from a different direction than the tax policies examined in this research. Rather than providing tax relief directly to entrepreneurs, the program is designed to encourage private investors to put more capital into eligible early-stage Missouri companies.

The new research does not tell us what impact Missouri’s angel incentive will have. But it reinforces the importance of the problem the policy seeks to address: Entrepreneurs’ ability to access the financial resources needed to start and grow businesses.

As Missouri implements the Angel Investment Incentive and considers other ways to strengthen entrepreneurship, policymakers should continue asking how public policy can remove barriers that prevent entrepreneurs from starting businesses, accessing capital, investing, and hiring.

This new research has clear implications for tax policy. But the bigger takeaway is that supporting entrepreneurs isn’t a niche policy concern—entrepreneurship should be at the center of conversations about how to grow Missouri’s economy.