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Taxes, tax administrative burdens and new firm formation

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  • Braunerhjelm, Pontus

    () (Entrepreneurship Forum, CESIS, KTH)

  • Eklund, Johan E.

    () (Entrepreneurship Forum, JIBS)

Abstract

This paper examines the tax administrative burden and its effect on new firm formation. It is well recognized that entrepreneurship and new firm formation are critical factors in determining economic growth and development. New firm entry into the marketplace enhances welfare in two distinct ways: 1) by promoting innovation, productivity and economic growth and 2) by increasing competition, which lowers prices and expands output. It is also well documented that barriers to entry reduce the likelihood that new firms will enter various sectors. We argue that the burden imposed by tax codes and tax compliance constitutes a barrier to entry that has been neglected in the previous literature. We use data from the World Bank to measure the administrative burden that the complexity of tax policy imposes on new firm. Additionally, we use a measure of new firm formation—entry density. Our data cover 118 countries over a period of six years. We find that the entry rate is significantly reduced by the tax administrative burden and that this effect is unrelated to general taxes on corporate profits and is robust to the inclusion of several important control variables.

Suggested Citation

  • Braunerhjelm, Pontus & Eklund, Johan E., 2013. "Taxes, tax administrative burdens and new firm formation," Working Paper Series in Economics and Institutions of Innovation 312, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  • Handle: RePEc:hhs:cesisp:0312
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jacques Pelkmans & Andrea Renda, "undated". "Does EU Regulation Hinder or Stimulate Innovation?," IRMO Occasional Papers 5, Institute for Development and International Relations, Zagreb.
    2. Pontus Braunerhjelm & Sameeksha Desai & Johan Eklund, 2015. "Regulation, firm dynamics and entrepreneurship," European Journal of Law and Economics, Springer, vol. 40(1), pages 1-11, August.
    3. Pourya Darnihamedani & Joern Hendrich Block & Jolanda Hessels & Aram Simonyan, 2015. "Start-up Costs, Taxes and Innovative Entrepreneurship," Tinbergen Institute Discussion Papers 15-013/VII, Tinbergen Institute.
    4. Jörn Block, 2016. "Corporate income taxes and entrepreneurship," IZA World of Labor, Institute for the Study of Labor (IZA), pages 257-257, May.
    5. Farzana Chowdhury & Siri Terjesen & David Audretsch, 2015. "Varieties of entrepreneurship: institutional drivers across entrepreneurial activity and country," European Journal of Law and Economics, Springer, vol. 40(1), pages 121-148, August.
    6. Pelkmans, Jacques & Renda, Andrea, 2014. "Does EU regulation hinder or stimulate innovation?," CEPS Papers 9822, Centre for European Policy Studies.

    More about this item

    Keywords

    tax administrative burden; entry; entrepreneurship; new firm formation; regulations; tax policy;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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