Corporate Taxes and High-Quality Entrepreneurship: Evidence from a Tax Reform

Abstract

We examine the impact of corporate taxation on entrepreneurship, using a quasi-natural experiment, which substantially reduced the corporate tax rate for start-ups located in inland municipalities in Portugal. Using a difference-indifferences approach and IV regression, we find that the tax reform increased firm entry by approximately 0.41% and birth job creation by 0.24% monthly, corresponding to an increase of 29,150 new firms, and 223,500 news jobs over a period of three years. We find that the entrepreneurs who took advantage of this tax reform are mostly male, relatively older and well-educated individuals. Their start-ups are relatively larger (up to 10 employees) and are on average more productive and more likely to survive their first three years. These findings suggest that corporate taxation is an imperative constraint for entrepreneurship, particularly for high-quality entrepreneurs. High-quality entrepreneurs can more easily overcome the hurdles of tax legislation and they have the required knowledge to tackle the opportunity created by a tax reform.