Entrepreneurial Innovations and Taxation
Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)
University of Munich - Seminar for Economic Policy; CESifo (Center for Economic Studies and Ifo Institute)
Research Institute of Industrial Economics (IFN)
January 2, 2012
IFN Working Paper No. 896
Many governments promote small businesses for the dual reasons of fostering ‘breakthrough’ innovations and employment growth. In this paper we study the effects of tax and subsidy policies on entrepreneurs’ choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.
Number of Pages in PDF File: 44
Keywords: entrepreneurship, innovation, corporate taxes, firm growth
JEL Classification: H25, L13, M13, O3working papers series
Date posted: April 30, 2012
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