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Reviving american entrepreneurship? tax reform and business dynamism

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  • Sedlacek, Petr
  • Sterk, Vincent

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 offsetting 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. Related to this is a large boost of the number of firms and of aggregate output, investment and employment.

Suggested Citation

  • Sedlacek, Petr & Sterk, Vincent, 2019. "Reviving american entrepreneurship? tax reform and business dynamism," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 94-108.
    • Handle: RePEc:eee:moneco:v:105:y:2019:i:c:p:94-108
    DOI: 10.1016/j.jmoneco.2019.04.009
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    Cited by:

    1. Bilicka, Katarzyna & Raei, Sepideh, 2023. "Output distortions and the choice of legal form of organization," Economic Modelling, Elsevier, vol. 119(C).
    2. Chao, Chi-Chur & Trinh, Cong Tam & Nguyen, Xuan, 2023. "Carbon neutrality and wage inequality in a sustainable economy: New evidence from business dynamism," Economic Modelling, Elsevier, vol. 127(C).
    3. Clementi, Gian Luca, 2019. "Comment on “Reviving American entrepreneurship? Tax reform and business dynamism” by Petr Sedláček and Vincent Sterk," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 109-113.
    4. Jelena J. Stankoviæ & Ivana Marjanoviæ & Sandra Milanoviæ & Milica Jovanoviæ Vujatoviæ, 2022. "Determinants of entrepreneurial dynamics:The Case of the European Union," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 40(2), pages 329-351.
    5. Federico S. Mandelman & Mehra dup Mishita & Hewei Shen, 2024. "Skilled Immigration Frictions as a Barrier for Young Firms," FRB Atlanta Working Paper 2024-2, Federal Reserve Bank of Atlanta.
    6. Benjamin Born & Gernot J. Müller & Moritz Schularick & Petr Sedláček, 2021. "The macroeconomic impact of Trump," Policy Studies, Taylor & Francis Journals, vol. 42(5-6), pages 580-591, November.
    7. Teegawende Zeida, 2022. "The Tax Cuts and Jobs Act (TCJA): A Quantitative Evaluation of Key Provisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 74-97, October.
    8. Neira, Julian & Singhania, Rish, 2020. "Quantifying the Effect of Corporate Taxes on the Life Cycle of Firms," MPRA Paper 99359, University Library of Munich, Germany.
    9. Philipp J. H. Schröder & Allan Sørensen, 2023. "Corporate taxation when firms are heterogeneous: ACE versus CBIT," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 396-418, April.

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    More about this item

    Keywords

    Taxation; Business dynamism; Aggregate productivity;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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