As votes continue to be tallied, the startup ecosystem may be wondering: what does this mean for us?
The world is waiting with bated breath for the results of a U.S. presidential election like nothing seen before in history. With a neck-and-neck race, a starkly divided America, a pandemic, and fires to be put out everywhere, it’s easy to overlook the minute policy changes that may come with a new president. And when the policy changes can often directly affect startups and small businesses, they’re worth paying attention to.
In the U.S. alone, it’s estimated that there are 30.7 million small businesses (defined as a business with fewer than 500 employees), making up 99.9% of all U.S. businesses. SMEs make up the majority of businesses around the globe, particularly in developing countries, and even by different definitions of ‘small business.’
All these businesses need to abide by regulations ranging from taxes to employee protections, and with the steady pace of globalization, can now even be acutely affected by changes in climate change or foreign policy.
Here’s an overview of the main proposed policy changes that are likely to affect startups in the U.S. and around the globe.
The Impact of Biden’s Corporate Tax Policy on Startups and Small Businesses
Biden plans to reverse the tax changes implemented by Trump in 2017 and increase the corporate tax rate from 21% to 28%. Trump has issued a series of warnings against the adverse effects of Biden’s proposed tax plan on the U.S. economy. However, experts disagree with his claims, and the proposed changes would still keep the tax rates way below the pre-2017 level of 35%.
Additionally, Biden also proposed an alternative minimum tax (AMT) of 15% on book income, to prevent profitable companies from avoiding tax liability as Amazon and Netflix have done. The AMT will be levied on companies with book income of $100 million or higher, although book income can differ significantly from taxable income. A Tax Foundation report suggests that this could needlessly increase the complexity of the tax preparation process.
Furthermore, Biden plans to impose a minimum tax of 21% on U.S. companies located overseas, twice the current rate, in order to prevent companies from avoiding tax liability through the use of global tax havens. The move aims to promote his “Made in America” initiative, to bring back jobs to the U.S. while increasing domestic investment.
Broadly speaking, the Democratic candidate’s proposed tax changes would require U.S. companies with overseas operations and affiliates to pay more taxes while those operating in the U.S. using domestic facilities would gain a tax credit.
Overall, the pundits seem to suggest that Biden’s conservative approach to corporate taxation will undoubtedly increase the tax burden of businesses, potentially hamper the international competitiveness of U.S. companies, and reduce productivity and wages.
However, the long-term impact on the economy cannot be accurately deduced at this point. While Moody’s Analytics predicts stronger economic growth under Biden’s leadership, the Tax Foundation estimates the new tax plan to shrink gross domestic product (GDP) by 1.62% in the long-term.
But most alarmingly, these tax hikes would adversely affect small businesses and startups in the U.S. According to calculations by Entrepreneur, Biden’s new corporate tax policy, which would also raise social security and medicare taxes, will increase the tax burden of a small business with gross revenue of $1.5 million by nearly 45%.
How Biden’s tech policy impacts startups and Big Tech
Biden and Harris have clearly expressed their desire to crack down on tech giants. But how this will impact technology policy, regulation of Internet platforms and emerging technologies remains unclear.
A study of Biden’s papers on economic recovery, however, presents a few possibilities:
1. Greater tech regulation
Since both Biden and his running mate Harris have been critical of tech companies, greater regulation of the tech sector is highly likely. This would mean cracking down on big tech companies who are accused of engaging in anti-competitive tactics, enforcing antitrust policies, privacy protection laws, cybersecurity, and reforms in Section 230 of the Communications Decency Act, which grants Internet platforms legal immunity for the majority of the content posted by users.
2. Algorithmic accountability for Artificial Intelligence startups
Biden and Harris are expected to implement tougher anti-bias enforcement, in order to fight bias that appears in AI systems which tends to magnify stereotypes and worsen the conditions of protected groups.
Long-time prosecutor Senator Harris will likely push for algorithm accountability and transparency, thereby increasing the need for AI startups to invest capital and resources to ensure compliance.
Moreover, the two Democrats will also likely seek to address the need for stronger barriers for facial recognition and other surveillance technologies, especially those used by law enforcement agencies. This would be in line with their stance on criminal justice and policing in the country.
3. Workforce diversity and worker’s rights in the tech sector
The Biden-Harris administration will also likely push for workforce diversity in the tech sector. For instance, they are likely to provide support and resources to tech startups led by diverse founders.
They are also expected to promote greater worker rights for contractors. Ride-hailing companies like Uber and Lyft employ independent contractors who receive few benefits or even fuel subsidies. This may or may not change under a Democrat-led administration – recently, California just stopped a bill that would reclassify gig workers as full-time employees.
However, Biden’s economic plan calls for an amendment of worker’s contracts to provide higher wages and greater benefits for independent contractors.
4. Closing the digital gap
Since Senator Harris has already been vocal about how the disparity in access to healthcare has led to higher rates of COVID-19 infection among Black communities, it is likely that she will push for greater equity in access to digital infrastructure. Access to online learning, telemedicine, and digital health would, therefore, be on her list of priorities.
5. Net Neutrality
During the Trump administration, the U.S. Federal Communications Commission repealed the net neutrality rules implemented by the Obama administration. The rules barred Internet Service Providers from blocking or discriminating against content and had made “fast lanes” illegal.
Although Biden has stayed out of the net neutrality debate, given Harris’ stance on social equity and justice, she is likely to reignite the conversation with the telecommunication sector for an open Internet.
Biden’s take on the climate crisis could be a win for startups
Getting world powers to agree on a pathway to climate action is a daunting ask. But they finally did so under the pioneering Paris Agreement.
The Paris Agreement is a coalition between 190 countries under the United Nations Framework Convention on Climate Change (UNFCCC). It aims to reduce greenhouse gas emissions to the extent that the rise in global temperatures be limited to 2°C.
The agreement was adopted at the 2015 United Nations Climate Change Conference. It entered into force in 2016.
A year later and freshly installed in the White House, Trump announced that the U.S. would be exiting the agreement. The move expectedly earned pushback, including from venture investors.
“I have always believed that, while we can disagree on the scientific premise behind climate change, we should all agree that advanced energy technologies represent one of the biggest economic opportunities,” Managing Director at General Catalyst Hemant Taneja told TechCrunch.
With formalities completed as per the rule book, the U.S. formally completed its withdrawal a day ago.
The U.S. says it quit the Paris Agreement because it does not press developing countries to curb emissions the way that industrialized countries do. It makes a valid point – China and India, both classified as developing countries, are top global polluters.
But a more pressing concern is Trump’s own beliefs about climate change. The controversial President has called himself an environmentalist. And yet, he has publicly stated that he doesn’t believe climate change exists, despite his own administration releasing a report on the dangers of climate change.
Biden is taking a radically different approach. He has announced his intentions to rejoin the Paris agreement in exactly 77 days if elected. His policies also include a $2 trillion investment into climate action and sustainability.
His investment plans cover infrastructure, the automotive sector, transportation, clean energy, buildings and housing, and agriculture.
He has also touched upon sustainable technologies, such as battery storage, negative emissions technologies, next-gen building materials, renewable hydrogen, and advanced nuclear energy.
Many of these industries are currently undergoing a period of transformation in the direction of sustainability.
As powerhouses of innovation, startups take the center stage of this development. Moreover, COVID-19 has only revved up the pace of change by spotlighting the need for sustainable tech.
Not only will startups be able to match Biden’s policy-level appetite for clean energy and tech, they will also be able to absorb the scores of jobs he aims to create within this field.
The Biden camp has not shared much on what role startups can play in their action plan. But as this VC suggests, they are a smart way of putting capital to use in taking these “unsolved technological problems” on.
Will a Biden presidency affect the U.S.-China trade war and the American foreign policy?
While U.S.-China relations have been brittle for decades, they have fully crumbled under the Trump administration. The talking points of the U.S.-China trade war were mainly tariffs, until COVID-19 came into the picture and further polarized the two sides.
This year, TikTok joined Huawei as a leading Chinese company facing backlash from the U.S and its allies. The trade war has also evolved into a full-blown tech cold war, covering 5G, data, cloud and more.
The Trump administration has also exerted its influence across South and Southeast Asia, publicly pushing back against China on issues such as the ongoing India-China border conflict and the South China Sea.
Consequently, a fundamental shift has taken place in the dynamics governing the world’s startup ecosystems. It has thrust startups on either side of the line of fire into an exaggerated period of uncertainty. (Read our in-depth analysis of how the U.S.-China trade war affects startups.)
It has also affected Chinese companies going public. The Shanghai Stock Exchange eclipsed Nasdaq as the top market for IPOs as of October this year. At the same time, Chinese companies have been rushing to list in U.S. markets amidst a tightening regulatory regime.
Biden’s approach suggests multilateralism over Trump’s more aggressive stance (although it is to be seen whether he will take a softer stance or retain the Trump administration’s policies).
He has said little about critical Trumpian policies, such as the imposition of heavy tariffs on China, or the retaliation against Chinese tech companies through its Clean Network Program. But the general flavor is that while he may be open to negotiating measures, he is unlikely to tone down the stringency of the U.S.’ approach thus far.
For instance, it is expected that regardless of a Trump or Biden win, developments in the trade war have permanently defined the grooves for Chinese startups wanting to go public in the U.S. The U.S. remains a lucrative market for companies intending to go public, just not anymore for Chinese ones.
On the issue of Hong Kong, Biden has vowed to enforce the Hong Kong Human Rights and Democracy Act which was signed by Trump last year. This could become a point of contention, with Hong Kong Chief Executive Carrie Lam pointing to the interests of U.S. businesses as an ulterior motive. Lam expressed the view at the next U.S. President will need to “comprehensively evaluate” their relationship with the special administrative region.
A clear winner amid this complex web is the Southeast Asian startup hub. The trade war had already prompted an exodus of companies from China into ASEAN nations. With Biden unlikely to move too many of the blocks currently in play, the region can look forward to a comfortable period of piggybacking off the U.S.-China trade war.
In line with the vagaries of any change in administration, particularly when partisan fervor is at its strongest, it is predictably hard to draw any solid conclusions from Biden’s campaign promises. In the U.S., should Biden’s policies make it past a recalcitrant Republican Senate, they may still be further slowed by bureaucracy.
And globally, though the world’s small businesses wait on tenterhooks for the election results, there is also the implicit understanding that at the end of the day, U.S. policies have always, and must always put America First, regardless of the global hegemony the country has enjoyed. It’s perhaps a good time for SMEs around the world to recognize that the route map for innovation is changing, and in order to stay ahead of the curve, they need to be prepared for anything.