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Taxes, tax administrative burdens and new firm formation

  • Braunerhjelm, Pontus

    ()

    (Entrepreneurship Forum, CESIS, KTH)

  • Eklund, Johan E.

    ()

    (Entrepreneurship Forum, JIBS)

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.

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File URL: https://static.sys.kth.se/itm/wp/cesis/cesiswp312.pdf
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Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 312.

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Length: 22 pages
Date of creation: 27 May 2013
Date of revision:
Handle: RePEc:hhs:cesisp:0312
Contact details of provider: Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/

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  1. Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 893-921, October.
  2. 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.
  3. Djankov, Simeon & La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2001. "The Regulation of Entry," Working Paper Series rwp01-015, Harvard University, John F. Kennedy School of Government.
  4. Alberto Alesina & Silvia Ardagna & Giuseppe Nicoletti & Fabio Schiantarelli, 2005. "Regulation And Investment," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 791-825, 06.
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  6. Simon C. Parker & Martin T. Robson, 2004. "Explaining International Variations in Self-Employment: Evidence from a Panel of OECD Countries," Southern Economic Journal, Southern Economic Association, vol. 71(2), pages 287-301, October.
  7. Jeffrey K. MacKie-Mason & Roger H. Gordon, 1994. "How Much Do Taxes Discourage Incorporation?," Public Economics 9401002, EconWPA.
  8. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
  9. Antonio Ciccone & Elias Papaioannou, 2007. "Red Tape and Delayed Entry," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 444-458, 04-05.
  10. Silvia Ardagna & Annamaria Lusardi, 2009. "Heterogeneity in the effect of regulation on entrepreneurship and entry size," NBER Working Papers 15510, National Bureau of Economic Research, Inc.
  11. Magnus Henrekson & Tino Sanandaji, 2011. "Entrepreneurship and the theory of taxation," Small Business Economics, Springer, vol. 37(2), pages 167-185, September.
  12. Fiori, Giuseppe & Nicoletti, Giuseppe & Scarpetta, Stefano & Schiantarelli, Fabio, 2007. "Employment Outcomes and the Interaction Between Product and Labor Market Deregulation: Are They Substitutes or Complements?," IZA Discussion Papers 2770, Institute for the Study of Labor (IZA).
  13. Roger H. Gordon, 1998. "Can High Personal Tax Rates Encourage Entrepreneurial Activity?," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 49-80, March.
  14. Bommarito, Michael J. & Katz, Daniel M., 2010. "A mathematical approach to the study of the United States Code," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(19), pages 4195-4200.
  15. Geroski, Paul A, 1989. "Entry, Innovation and Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 572-78, November.
  16. Gschwandtner, Adelina & Lambson, Val E., 2002. "The effects of sunk costs on entry and exit: evidence from 36 countries," Economics Letters, Elsevier, vol. 77(1), pages 109-115, September.
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