Taxes, tax administrative burdens and new firm formation

Abstract

Summary This paper examines the tax administrative burden and its effect on new firm formation. It is well recognized that entrepreneurship and new firm formation are critical factors in determining economic growth and development. New firm entry into the marketplace enhances welfare in two distinct ways: 1) by promoting innovation, productivity and economic growth and 2) by increasing competition, which lowers prices and expands output. It is also well documented that barriers to entry reduce the likelihood that new firms will enter various sectors. We argue that the burden imposed by tax codes and tax compliance constitutes a barrier to entry that has been neglected in the previous literature. We use data from the World Bank to measure the administrative burden that the complexity of tax policy imposes on new firms. Additionally, we use a measure of new firm formation – entry density. Our data cover 118 countries over a period of six years. We find that the entry rate is significantly reduced by the tax administrative burden and that this effect is unrelated to general taxes on corporate profits and is robust to the inclusion of several important control variables.

Financial and Institutional Reforms for an Entrepreneurial Society

“…High start-up costs not only reduce entrepreneurship rates but may also influence the quality and type of entrepreneurship. To date, a large literature covers the effects of taxes and start-up costs on entrepreneurship rates (Gentry and Hubbard 2000;Djankov et al 2002;Lundström and Stevenson 2005;Klapper et al 2006;Braunerhjelm and Eklund 2014). However, this literature largely overlooks the quality implications of such barriers.…”

"Start-up costs, taxes and innovative entrepreneurship"

“…Levie and Autio, 2011;Dreher and Gassebner, 2013;Braunerhjelm and Eklund, 2014). We use the World Competitiveness Yearbook (WCY) for information about corporate and personal income tax rates, as well as for some control variables (e.g., GDP growth, GDP per capita).…”

“…In the next section, we present the regression results. The main control variables correspond to Braunerhjelm and Eklund (2014) and are added stepwise to avoid multicollinearity concerns.…”

“…A number of prior studies have linked start-up costs and taxes to the level of entrepreneurial activity within and across economies (Djankov et al, 2002;Lundstrom and Stevenson, 2002;Gentry and Hubbard, 2000;Braunerhjelm and Eklund, 2014). For example, for a sample of European firms, Klapper et al (2006) show that high start-up costs hamper the creation of new firms, particularly in sectors that should naturally have high entry rates.…”

Local Competitiveness Fostered through Local Institutions for Entrepreneurship

“…Their influence on entrepreneurship is accordingly often analyzed in cross-country studies (e.g., Braunerhjelm and Eklund 2014, Djankov et al 2010and Nicoletti and Scarpetta 2003. We argue indeed that local institutions for entrepreneurship always develop and emerge against the backdrop of a national institutional context.…”