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The Tax Incentives on Entrepreneurship and Firms (in Finnish with English abstract and summary)

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  • Kanniainen, Vesa

Abstract

The report surveys the incentive effects of taxes on capital and entrepreneurial income in light of the research in the field. The cash flow tax, the ACE tax and the tax on distributed profits of mature firms are known to be neutral with respect to the investment decisions. It is not widely understood that they are not neutral with respect to the entry decisions of start-up firms. The idea of creating tax incentives represents a departure from the neutrality principle. The entrepreneurial risk does not as such justify an investment incentive but an asymmetric tax treatment of it does. The Nordic dual income tax encourages the start-up investment of an entrepreneur who is expecting relatively high profitability. However, when setting the share of entrepreneurial income to be taxed as capital income, the failure risk matters. The empirical studies on the relation between the income tax rates and entrepreneurship point – due to the tax avoidance motive – to a positive relationship, though only at high tax rates. When judging the tax incentives on R&D spending, the strategic behavior between firms becomes relevant to be analyzed. Underinvestment or overinvestment are both potential outcomes. The entry barriers reduce in principle the validity of a tax policy based on the idea of tax neutrality.

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Bibliographic Info

Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1058.

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Length: 28 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:rif:dpaper:1058

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Keywords: entrepreneurship; taxation; tax incentives;

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