Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe
Marco Da Rin
Department of Finance Tilburg University; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)
Marina Di Giacomo
University of Turin - Department of Economics and Statistics
University of Turin - Department of Economics and Financial Sciences G. Prato
July 29, 2009
CentER Discussion Paper Series No. 2009-61
TILEC Discussion Paper No. 2010-026
Can tax policy foster the creation of new companies? To answer this question, we assemble a novel country-industry level panel database with data on entry (by incorporation) for 17 European countries between 1997 and 2004. Our analysis is based on recent models of how corporate taxation affects firm’s incorporation decision. We compute effective average tax rates and study how the taxation of corporate income affects entry rates at the country-industry level. Drawing on the political economy literature, we account for the possible endogeneity of taxation. We find a significant negative effect of corporate income taxation on entry rates. The effect is concave and suggests that tax reductions affect entry rates only below a certain threshold tax level. We also find that a reduction in corporate tax rates is more effective in countries with better institutional infrastructure. Our results are robust to alternative measures of effective taxation and to the use of alternative and additional explanatory variables.
Number of Pages in PDF File: 59
Keywords: Entrepreneurship, Corporate income taxation, Incorporation, Political economy, Firm entry, Entry regulation, Panel data
JEL Classification: C23, H32, L51, M13
Date posted: September 3, 2008 ; Last revised: July 23, 2010
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