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Taxation and the Quality of Entrepreneurship

  • Asoni, Andrea

    ()

    (Research Institute of Industrial Economics (IFN))

  • Sanandaji, Tino

    ()

    (Research Institute of Industrial Economics (IFN))

We study the effect of taxation on entrepreneurship, taking into account both the amount of entry and the quality of new ventures. We show that even with risk neutral agents and no tax evasion progressive taxes can increase entrepreneurial entry, while reducing average firm quality. So called "success taxes" increase startup of lower value business ideas by reducing the option value of pursuing better projects. This suggests that the most common measure used in the literature, the likelihood of entry into self-employment, may underestimate the adverse effect of taxation.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 813.

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Length: 46 pages
Date of creation: 13 Nov 2009
Date of revision: 30 Oct 2013
Publication status: Published as Asoni, Andrea and Tino Sanandaji, 'Taxation and the Quality of Entrepreneurship' in Journal of Economics , 2014, pages 101-123.
Handle: RePEc:hhs:iuiwop:0813
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Phone: +46 8 665 4500
Fax: +46 8 665 4599
Web page: http://www.ifn.se/
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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  2. Bruce, Donald, 2000. "Effects of the United States tax system on transitions into self-employment," Labour Economics, Elsevier, vol. 7(5), pages 545-574, September.
  3. Magnus Henrekson & Tino Sanandaji, 2011. "Entrepreneurship and the theory of taxation," Small Business Economics, Springer, vol. 37(2), pages 167-185, September.
  4. Stenkula, Mikael, 2009. "Taxation and Entrepreneurship in a Welfare State," Working Paper Series 800, Research Institute of Industrial Economics.
  5. Steven N. Kaplan & Berk A. Sensoy & Per Strömberg, 2009. "Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies," Journal of Finance, American Finance Association, vol. 64(1), pages 75-115, 02.
  6. Marco Cagetti & Mariacristina De Nardi, 2003. "Entrepreneurship, frictions and wealth," Working Papers 620, Federal Reserve Bank of Minneapolis.
  7. Richard Kneller & Danny McGowan, 2012. "Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries," Working Papers 12006, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  8. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  9. Tino Sanandaji & Peter T. Leeson, 2013. "Billionaires," Industrial and Corporate Change, Oxford University Press, vol. 22(1), pages 313-337, February.
  10. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  11. Cullen, Julie Berry & Gordon, Roger H., 2007. "Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1479-1505, August.
  12. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1992. "Tax Distortions to the Choice of Organizational Form," NBER Working Papers 4227, National Bureau of Economic Research, Inc.
  13. Ljungqvist, Lars & Sargent, Thomas J, 1995. "Welfare States and Unemployment," Economic Theory, Springer, vol. 6(1), pages 143-60, June.
  14. Gentry, William M. & Hubbard, R. Glenn, 2004. "The effects of progressive income taxation on job turnover," Journal of Public Economics, Elsevier, vol. 88(11), pages 2301-2322, September.
  15. Donald Bruce & John Deskins, 2012. "Can state tax policies be used to promote entrepreneurial activity?," Small Business Economics, Springer, vol. 38(4), pages 375-397, May.
  16. Henrekson, Magnus, 2007. "Entrepreneurship and Institutions," Working Paper Series 707, Research Institute of Industrial Economics.
  17. Vesa Kanniainen & Paolo M. Panteghini, 2013. "Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(2), pages 167-193, June.
  18. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
  19. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  20. Kanbur, S M Ravi, 1982. "Entrepreneurial Risk Taking, Inequality, and Public Policy: An Application of Inequality Decomposition Analysis to the General Equilibrium Effects of Progressive Taxation," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 1-21, February.
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