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Entrepreneurial Innovations and Taxation

  • Haufler, Andreas

    ()

    (University of Munich)

  • Norbäck, Pehr-Johan

    ()

    (Research Institute of Industrial Economics (IFN))

  • Persson, Lars

    ()

    (Research Institute of Industrial Economics (IFN))

Many governments promote small businesses for the dual reasons of fostering ‘breakthrough’ innovations and employment growth. In this paper we study the effects of tax and subsidy policies on entrepreneurs’ choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 896.

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Length: 43 pages
Date of creation: 02 Jan 2012
Date of revision:
Handle: RePEc:hhs:iuiwop:0896
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