Entrepreneurship and the Theory of Taxation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: A review of the literature on firm taxation reveals that the economics of entrepreneurship has not sufficiently been taken into consideration. We discuss how this affects conclusions derived from standard models of capital taxation when applied to entrepreneurial income. Some defining features of entrepreneurship important for analyzing the effects of taxation of owner-managed firms are identified. These include the lack of a well-functioning external market for entrepreneurial effort, limited access to external capital and complementarities between entrepreneurial innovation, effort and capital. Due to these constraints, the entrepreneurial project is tied to the individual owner-manager. The entrepreneur is unable to decouple saving decisions from investment decisions, and makes joint decisions on the supply of effort and capital. The return from successful entrepreneurial ventures can therefore not be readily divided into labor and capital income, in deep contrast to what is typically assumed in taxation theory. It is argued that when distinct attributes of entrepreneurship are taken into account, certain conclusions of capital taxation models may no longer hold, including the neutrality of capital taxation in owner-managed firms. Cost of capital formulas derived from the behavior of public firms could underestimate distortions when applied to the investment behavior of entrepreneurial firms. Terms of use: Documents inFor tax purposes and otherwise, it becomes useful to analyze return to entrepreneurial activity as income of a distinct factor of production. In this context, conceptual issues and the difficulties of measuring entrepreneurial income are discussed.

Taxes, tax administrative burdens and new firm formation

“…The results are somewhat inconclusive, but the overall conclusion of these studies appears to be that the effect of the level of individual taxes is ambiguous (sometime even positive), whereas increased marginal rates have a discernible negative effect on the propensity to become an entrepreneur. See Hansson , and Henrekson and Sanandaji for surveys.…”

Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship

“…By setting = and =0 (50) collapses to (18). Given this result and Proposition 1, we can thus say that the joint application of uniform taxation and economic depreciation ensures tax-rate invariance.…”

“…18 For simplicity, we assume that re-entering the labor market is an irreversible choice. We also introduce the following:…”