Tax policy, corruption, and formal business entry: Cross-country evidence from emerging economies

Irina Bilan () and Constantin-Marius Apostoaie ()
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Irina Bilan: Alexandru Ioan Cuza University of Iaşi
Constantin-Marius Apostoaie: Alexandru Ioan Cuza University of Iaşi

Economic Change and Restructuring, 2025, vol. 58, issue 2, No 9, 56 pages

Abstract: Abstract This paper examines the interplay between formal and informal institutions in driving new business creation across 44 emerging and frontier economies. Specifically, using data from 2006 to 2021, it explores how tax rates, fiscal administrative burdens, and corruption interact to influence the registration of new companies. We reveal that higher corporate taxes stifle entrepreneurship by reducing after-tax profits and incentivizing informality, whereas higher labor taxes, counterintuitively, boost new business entry by altering individuals’ occupational choices. Complex tax administration procedures create a ‘bottleneck’ effect, discouraging business registration and underscoring the need for streamlined processes. Interestingly, corruption plays a double-edged role: while it generally ‘sands the wheels’ of new business creation, it can also ease the burden of tax administration, aligning with the ‘grease the wheels’ theory. To promote formal business creation as a key driver of economic growth, governments in emerging economies should adopt a balanced approach by simplifying fiscal procedures while strengthening their efforts to tackle corruption.

Keywords: New firm registration; Profit tax; Labor tax; Tax administrative burden; Corruption; Emerging and frontier countries (search for similar items in EconPapers)
JEL-codes: H29 L26 O50 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10644-025-09865-4

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