ANSWER

Sure they can. Just make it as cheap as possible to start a company: Focus on deregulation and tax cuts for small businesses.

QUESTION

Can America tax-cut its way to innovation?

Entrepreneurship is always a risk, and one approach to encouraging more start-ups is to make it less expensive to jump from employee to entrepreneur. You could, for example, set aside tax cuts for companies under a certain size, or encourage more deregulation in certain industries that new firms are trying to enter.

But tax cuts and deregulation come with their own set of concerns. And beware the unintended consequences of gutting taxes and regulation for any constituency, even when it’s a treasured category like “small business."

If the government structures the tax code to dramatically benefit small companies, then start-ups might have less incentive to grow beyond certain sizes. For example, a tax credit for companies with fewer with 10 employees also acts as a huge marginal tax rate on each of those companies’ 11th employees. Too much deregulation might also have negative consequences. If you relax the regulations on domestic mobile money apps to attract more competition, you might also allow more fraud. In sum, the case for warping taxes and regulation to benefit small companies and start-ups means creating new laws and loopholes that might not always have great outcomes.

What’s more, the countries with the most small businesses often have high taxes.

ANSWER

Well, the entrepreneurs—the people taking on the risk—deserve some kind of a break. Let's make failure a softer blow by strengthening the safety net, and pay for it by raising taxes.

QUESTION

Would realistic approaches to strengthening that safety net spur entrepreneurship? Providing universal health care and instituting a stronger welfare policy, or even a universal basic income, might reduce the risk of striking out on one’s own. But on its own, this does little to grow the supply of good ideas.

Several Scandinavian and northern European countries have higher rates of entrepreneurship than the United States. Maybe that’s not a coincidence. It’s possible that stronger safety nets could be a boon to entrepreneurs by mitigating the risk of going it alone.

Indeed, starting and sustaining a start-up carries risk, and one reason many would-be entrepreneurs resist doing their own thing is that, if they fail, they lose more than a job: They lose subsidized health-care coverage, too. Several studies have found evidence of "entrepreneurship lock," where workers are “locked” into their jobs, because they would pay much more for insurance as one-person companies.

But a comprehensive policy for innovation needs more than universal health care to lay out a safety net for America’s daring thinkers. It requires ideas for improving the quality of American thinking.