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Entrepreneurial innovations and taxation

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  • Andreas Haufler

    (University of Munich and CESifo)

  • Pehr-Johan Norbaeck

    (Research Institute of Industrial Economics, Stockholm)

  • Lars Persson

    (Research Institute of Industrial Economics, Stockholm and CEPR)

Abstract

Many governments promote small businesses for the dual reasons of fostering `break-through' innovations and employment growth. In this paper we study the effects of tax and subsidy policies on entrepreneurs' choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1122.

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Date of creation: 2011
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Handle: RePEc:btx:wpaper:1122

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Cited by:
  1. Andreas Hau fler & Mohammed Mardan, 2013. "Cross-border loss offset can fuel tax competition," Working Papers 1310, Oxford University Centre for Business Taxation.

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