Reviving American Entrepreneurship? Tax Reform and Business Dynamism

39 Pages Posted: 31 Jul 2018

See all articles by Petr Sedlacek

Petr Sedlacek

University of Oxford

Vincent Sterk

University College London

Date Written: July 2018

Abstract

The 2017 Tax Cuts and Jobs Act slashed tax rates on business income and introduced immediate expensing of investments. Using a quantitative heterogeneous firms model, we investigate the long-run effects of such tax reforms on firm dynamics. We find that they can substantially increase business dynamism, potentially off-setting the large decline in the U.S. startup rate observed over recent decades. This result is driven by indirect equilibrium forces: the tax reform stimulates firm entry, leading to an increase in labor demand and wages, which in turn makes firm selection more stringent. Related to this is a large boost of the number of firms and of aggregate output, investment and employment.

JEL Classification: D21, E22, E24, H25

Suggested Citation

Sedlacek, Petr and Sterk, Vincent, Reviving American Entrepreneurship? Tax Reform and Business Dynamism (July 2018). CEPR Discussion Paper No. DP13073, Available at SSRN: https://ssrn.com/abstract=3222585

Petr Sedlacek (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Vincent Sterk

University College London ( email )

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