Does Tax Complexity Discourage Entrepreneurship?

Abstract

We investigate claims that the complexity of the tax system discourages entrepreneurship. We use tax filing assistance centers, which help entrepreneurs file their taxes, as sources of plausibly exogenous variation in the tax complexity effectively facing potential entrepreneurs. We find that tax filing assistance centers significantly increase local entrepreneur entry, overall Schedule C business income, and Census establishments, suggesting that tax complexity significantly discourages entrepreneurship. These results appear specific to traditional business entrepreneurs and not innovation-driven entrepreneurs. 

Keywords: Entrepreneurship, tax complexity, taxation, new business formation

JEL Classification: H23, H25, L26, M13