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Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries

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  • Richard Kneller

    (University of Nottingham)

  • Danny McGowan

    ()
    (Bangor Business School)

Abstract

In this paper we study the effects of reforms to corporate and personal income taxation on the rate of firm entry and exit using industry data for 19 OECD countries from 1998 to 2005. Using a difference-in-differences approach to correct for endogeneity bias we find that increases in corporate taxation affect entry but not exit. The effects of personal taxation depend upon the marginal tax rate that is altered. Increases in marginal tax rates applied at low income levels negatively affect entry and positively affect exit, whereas marginal tax reforms at higher income levels have the opposite effect.

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Bibliographic Info

Paper provided by Bangor Business School, Prifysgol Bangor University (Cymru / Wales) in its series Working Papers with number 12006.

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Date of creation: Apr 2012
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Handle: RePEc:bng:wpaper:12006

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Keywords: income taxation; firm entry; firm exit; difference in differences;

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References

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  1. Elie Appelbaum & Eliakim Katz, 1996. "Corporate taxation, incumbency advantage and entry," Working Papers 1996_12, York University, Department of Economics.
  2. Da Rin, Marco & Di Giacomo, Marina & Sembenelli, Alessandro, 2011. "Entrepreneurship, firm entry, and the taxation of corporate income: Evidence from Europe," Journal of Public Economics, Elsevier, vol. 95(9), pages 1048-1066.
  3. Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828 Elsevier.
  4. Edvard Johansson, 2005. "An estimate of self-employment income underreporting in Finland," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 31, pages 99-109.
  5. Apel,M., 1994. "An Expenditure-Based Estimate of Tax Evasion in Sweden," Papers 1, Uppsala - Working Paper Series.
  6. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 1998. "Entrepreneurs, Income Taxes, and Investment," NBER Working Papers 6374, National Bureau of Economic Research, Inc.
  7. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2008. "The Effect of Corporate Taxes on Investment and Entrepreneurship," NBER Working Papers 13756, National Bureau of Economic Research, Inc.
  8. Herb J. Schuetze, 2002. "Profiles of Tax Non-compliance Among the Self-Employed in Canada: 1969 to 1992," Canadian Public Policy, University of Toronto Press, vol. 28(2), pages 219-237, June.
  9. Manjon, M.C., 2004. "Firm Size and Short-Term Dynamics in Aggregate Entry and Exit," Discussion Paper 2004-2, Tilburg University, Center for Economic Research.
  10. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Restructuring and productivity growth in uk manufacturing," Economic Journal, Royal Economic Society, vol. 113(489), pages 666-694, 07.
  11. Da Rin, M. & Di Giacomo, M. & Sembenelli, A., 2010. "Corporate taxation and the size of new firms: Evidence from Europe," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3607199, Tilburg University.
  12. Gurley–Calvez, Tami & Bruce, Donald, 2008. "Do Tax Cuts Promote Entrepreneurial Longevity?," National Tax Journal, National Tax Association, vol. 61(2), pages 225-50, June.
  13. Gentry, William M. & Hubbard, R. Glenn, 2004. "The effects of progressive income taxation on job turnover," Journal of Public Economics, Elsevier, vol. 88(11), pages 2301-2322, September.
  14. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
  15. André van Stel & Roy Thurik & Dennis Fok & Andrew Burke, 2009. "The Dynamics of Entry and Exit," Scales Research Reports H200907, EIM Business and Policy Research.
  16. Donald Bruce & Mohammed Mohsin, 2006. "Tax Policy and Entrepreneurship: New Time Series Evidence," Small Business Economics, Springer, vol. 26(5), pages 409-425, 06.
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Cited by:
  1. Gemmell, Norman & Kneller, Richard & McGowan, Danny & Sanz, Ismael & Sanz-Sanz, José F., 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European firms," Working Paper Series 2705, Victoria University of Wellington, Chair in Public Finance.
  2. Robert M. Feinberg & Thomas A. Husted & Florian Szücs, 2013. "Does State Antitrust Enforcement Drive Establishment Exit?," Discussion Papers of DIW Berlin 1323, DIW Berlin, German Institute for Economic Research.
  3. Elie Appelbaum & Eliakim Katz, 1996. "Corporate taxation, incumbency advantage and entry," Working Papers 1996_12, York University, Department of Economics.

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