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Firm Entry Dynamics and Taxation of Corporate Profits: Evidence from Europe

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Author Info
Da Rin, M.
Di Giacomo, M.
Sembenelli, A. (Tilburg University, Center for Economic Research)

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Abstract

Can tax policy foster the creation of new companies? To answer this question, we assemble a novel country-industry level panel database with entry data of European companies between 1997 and 2004. We compute effective tax rates and explore the effect of corporate taxation policy on entry rates at country-industry level. Drawing on the recent political economy literature, we also account for the endogeneity of taxation. We find a significant negative effect of corporate income taxation on entry rates. The effect is concave and suggests that tax reductions affect entry rates only below a certain threshold tax level. We also find that a reduction in corporate tax rates is more effective in countries with better institutional infrastructure. Our results are robust to alternative measures of effective taxation and to the use of alternative and additional explanatory variables.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-65.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200865

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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