Corporate taxes and high-quality entrepreneurship
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Corporate taxes and high-quality entrepreneurship Ana Venâncio
&
Victor Barros & Clara Raposo
Accepted: 5 October 2020 # The Author(s) 2020
Abstract We examine the impact of corporate taxation on entrepreneurship, using a quasi-natural experiment, which substantially reduced the corporate tax rate for start-ups located in inland municipalities in Portugal. Using a difference-in-differences approach and IV regression, we find that the tax reform increased firm entry and new firm job creation. The entrepreneurs who took advantage of this tax reform are relatively older, and are better-educated individuals. Their start-ups are relatively larger, more productive, and are more likely to survive the first 3 years. These findings suggest that corporate taxation is an imperative constraint for entrepreneurship, particularly for high-quality entrepreneurs. These better-educated individuals find it easier to overcome the hurdles of tax legislation and to make use of the opportunities created by a specific tax reform.
Keywords Tax reform . Corporate taxes . Firm entry . Job creation . High-quality entrepreneurship
JEL classifications H25 . L26 . M13 . J24
A. Venâncio (*) : V. Barros : C. Raposo ISEG-Lisbon School of Economics and Management, Universidade de Lisboa, and ADVANCE/CSG, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal e-mail: [email protected]
1 Introduction The effect of taxes on entrepreneurial activity has enjoyed a recent resurge in the empirical literature (Block 2016; Braunerhjelm and Eklund 2014; Darnihamedani et al. 2018). Empirical evidence links higher corporate taxes with slower economic growth and also lower productivity, innovation, investment, firm creation, and employment (Djankov et al. 2010; Da Rin et al. 2011; Bacher and Brülhart 2012; Baliamoune-Lutz and Garello 2014; Haufler et al. 2014; Belitski et al. 2016; Mukherjee et al. 2017). Therefore, reducing taxes is perceived to be an effective tool for encouraging firm creation and employment. However, despite the perceived belief that tax reductions promote entrepreneurial activity and address economic growth, there is still ambiguity regarding the type of ventures and entrepreneurs which take advantage of such tax reforms. In this paper, we evaluate the effect of corporate taxes on entrepreneurship. Similar to previous studies, we investigate the impact of corporate taxes on firm formation and new firm job creation. However, contrary to previous studies, we take the additional step of exploring the characteristics of the founders and of the startups which took advantage of a specific tax reform. Portugal provides an excellent context for evaluating the effect of taxes on entrepreneurship, for several reasons. First, Portugal offers an opportunity to assess the role of taxes in firm formation in a “neutral” tax setting. The majority of studies are based on data from the
A. Venâncio et al.
USA,1 which is a country where the tax structure rewards risk-taking and tax-driven entrepreneurship, by making it particularly attractive for hig
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