Tax Structure and Entrepreneurship

Abstract

Using macro level panel data, we examine the effects of taxation and tax progressivity on entrepreneurship in a large group of European countries. We address two main objectives. First, we try to explore whether tax increases discourage entrepreneurial activity, focusing on new self employment (nascent entrepreneurship). Second, we investigate the impact of tax progressivity on entrepreneurship, again focusing on the impact on new self employment. We find that tax progressivity at higher than average incomes has a robust negative effect on nascent entrepreneurship. We discuss the policy implications of our results.

Taxes and Entrepreneurship in Oecd Countries

“…As noted in Baliamoune‐Lutz and Garello (), the theoretical literature generally points to three possible outcomes. First, if the entrepreneur is risk averse, then a progressive tax schedule might work as an insurance scheme and increase entry into self‐employment relatively to a proportional tax scheme (Domar and Musgrave ).…”

“…Similarly, Bruce () obtains evidence in favor of a positive effect of marginal tax rates on self‐employment in the United States. On the other hand, Robson (), Gentry and Hubbard (), and Baliamoune‐Lutz and Garello () fail to obtain evidence of significant effects of marginal tax rates on entrepreneurship in the United Kingdom, United States, and 15 European countries, respectively.…”

“…The few studies that have used macro‐level data tend to employ single‐country time series instead of panel data. Moreover, to my best knowledge, with the exception of Baliamoune‐Lutz and Garello () there are no empirical studies that have used cross‐country panel datasets to explore the effects of tax progressivity on entrepreneurship at the macro level. The most important contribution of this article is the comparison of tax impacts on two different measures of entrepreneurial activity, established and nascent entrepreneurship rates.…”

Corporate income taxes and entrepreneurship

“…This must be distinguished from personal income taxes (taxes to be paid on earned income by wage workers or the self-employed), capital income taxes (taxes to be paid on dividend or interest income), and capital gains taxes (taxes to be paid on profits that an investor realizes when he or she sells a capital asset for a price that is higher than the purchase price), which have also been the subjects of prior research regarding the relationship between taxation and entrepreneurship (see e.g. [4] for the effect of personal income taxation on entrepreneurship and [5] for the effect of capital gains taxation on the creation of venture capital markets).…”

Taxes and Supply of Labor by Entrepreneurs

“…Garello! [1]also! examine!the!effect!of!tax!progressivity!on!entry!into!entrepreneurship!using!data!from!a!group!…”