Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe
Journal of Public Economics, vol. 95, N. 9-10, pp.1048-1066, October 2011
59 Pages Posted: 3 Sep 2008 Last revised: 4 Apr 2016
Date Written: July 29, 2009
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.
Keywords: Entrepreneurship, Corporate income taxation, Incorporation, Political economy, Firm entry, Entry regulation, Panel data
JEL Classification: C23, H32, L51, M13
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