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Taxes, tax administrative burdens and new firm formation

Pontus Braunerhjelm and Johan Eklund ()

No 312, Working Paper Series in Economics and Institutions of Innovation from Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: This paper examines the tax administrative burden and its effect on new firm formation. It is well recognized that entrepreneurship and new firm formation are critical factors in determining economic growth and development. New firm entry into the marketplace enhances welfare in two distinct ways: 1) by promoting innovation, productivity and economic growth and 2) by increasing competition, which lowers prices and expands output. It is also well documented that barriers to entry reduce the likelihood that new firms will enter various sectors. We argue that the burden imposed by tax codes and tax compliance constitutes a barrier to entry that has been neglected in the previous literature. We use data from the World Bank to measure the administrative burden that the complexity of tax policy imposes on new firm. Additionally, we use a measure of new firm formation—entry density. Our data cover 118 countries over a period of six years. We find that the entry rate is significantly reduced by the tax administrative burden and that this effect is unrelated to general taxes on corporate profits and is robust to the inclusion of several important control variables.

Keywords: tax administrative burden; entry; entrepreneurship; new firm formation; regulations; tax policy (search for similar items in EconPapers)
JEL-codes: D22 H20 K20 L26 L51 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-05-27
New Economics Papers: this item is included in nep-acc, nep-bec, nep-ent, nep-iue and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Published as Braunerhjelm, Pontus and Johan E. Eklund, 'Taxes, tax administrative burdens and new firm formation' in Kyklos, 2014, pages 1-11.

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