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When a small business purchases a capital asset, its cost for tax purposes is spread over the useful life of the asset through the process of depreciation. It has become common in the USA for policy makers to enhance depreciation rules in an effort to increase business investment in a less-costly manner than across-the-board marginal tax rate cuts. Indeed, short-term depreciation policies are often billed by policy makers as a way to save America's small businesses. However, little is known about the actual effects of depreciation policies on small business activity. This paper aims to discuss these issues.

In this initial attempt to test the political claims regarding the importance of depreciation rules, the paper uses a 12-year panel of tax returns for Schedule C sole proprietors to empirically examine whether more generous depreciation policies influence small business activity at the extensive margin. Specifically, the paper estimates a series of multivariate models to explain sole proprietors’ decisions to remain in business as functions of their financial, demographic, and tax situations, including measures of the present discounted value (PDV) of a stream of tax deductions for depreciated capital under various rule structures.

Throughout the analysis, the authors are unable to find evidence that favorable depreciation rules lead to greater rates of entrepreneurial longevity among Schedule C sole proprietors.

Discrete choice results suggest that increases in the PDV of tax reductions from depreciation (e.g. depreciating the value earlier in the recovery period) might actually lead to higher probabilities of small business exit, while survival analysis finds no clear influence of depreciation on spells of small business activity.

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.