Corporate Taxation and the Size of New Firms: Evidence from Europe

Abstract

Using a novel country-industry level panel database with information on newly incorporated firms in 17 European countries between 1997 and 2004, we study how taxation of corporate income affects the size of entrants at the country-industry level. Our results, that are robust to changes in several assumptions, suggest that a reduction in the effective corporate income tax rate leads to a significant reduction of the capital size of entrants, and to a decrease in their capital-labor ratio.

Keywords: Entrepreneurship, Corporate income taxation, Incorporation, Firm entry, Firm size, Entry regulation, Panel data

JEL Classification: C23, H32, L26, L51, M13