Policy makers have long been interested in whether tax policies can be used to encourage entrepreneurial activity, but prior studies have produced ambiguous results. The purpose of this paper is to investigate whether tax rates affect the decision to begin a new entrepreneurial venture.
The paper uses a 12-year panel of tax return data to examine the effects of tax rates on entrepreneurial entry. The paper calculates household-level tax rates and employ multiple measures of entrepreneurship.
The results offer evidence that cuts in relative tax rates faced by entrepreneurs, either in the form of higher rates for wage workers or lower rates for entrepreneurs, increase entry. The magnitudes of these effects suggest that an across the board tax cut would increase entry.
These results suggest that policy makers interested in entrepreneurial activity should account for the affects of tax policies on entrepreneurial activity in their decision making.
The data represent the most accurate publicly available tax information. We expand on previous work by recognizing that many entrepreneurial households also receive wage-and-salary income and addressing whether the effects differ by degree of entrepreneurship (e.g. full-time vs part-time). The analysis of households also includes a broader set of entrepreneurs than prior work, which has typically limited the sample to working-age male household heads. Ultimately, the paper finds robust results suggesting an effect opposite from much of the previous literature, but consistent with recent evidence on entrepreneurial exit decisions.
The authors are grateful to the US Small Business Administration, which provided a research grant for this work (Contract No. SBAHQ-03-M-0535 – Small Business Research Using Large Databases). The dissertation that served as a foundation for this work was also funded in part by the Ewing Marion Kauffman Foundation, for which Dr Gurley-Calvez is grateful. They also thank Daniel Feenberg and Jean Roth at the National Bureau of Economic Research for access to and assistance with the TAXSIM model, Herb Schuetze for many helpful conversations, and Karie Barbour for expert programming assistance. Additional valuable feedback was provided by Bill Neilson, Joe Johnson and seminar participants at Vassar College, the University of Michigan, the University of Tennessee, and the International Institute of Public Finance. For assistance in procuring the data for this project, They thank the Center for Business and Economic Research at the University of Tennessee and the Center for Policy Research at Syracuse University. The contents of this work are solely the responsibility of the authors and do not necessarily reflect the views of the Kauffman Foundation, or the SBA.
Gurley-Calvez, T. and Bruce, D. (2013), "Do tax rate cuts encourage entrepreneurial entry?", Journal of Entrepreneurship and Public Policy, Vol. 2 No. 2, pp. 178-202. https://doi.org/10.1108/JEPP-01-2012-0002Download as .RIS
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