Entrepreneurship, Firm Entry, and the Taxation of Corporate Income

Evidence from Europe

M. Da Rin, M. Di Giacomo, A. Sembenelli

Research output: Working paperDiscussion paperOther research output

Abstract

Can tax policy foster the creation of new companies? To answer this question, we assemble a novel country-industry level panel database with data on entry (by incorporation) for 17 European countries between 1997 and 2004. Our analysis is based on recent models of how corporate taxation affects firm’s incorporation decision. We compute effective average tax rates and study how the taxation of corporate income affects entry rates at the country-industry level. Drawing on the political economy literature, we account for the possible endogeneity of taxation. We find a significant negative effect of corporate income taxation on entry rates. The effect is concave and suggests that tax reductions affect entry rates only below a certain threshold tax level. We also find that a reduction in corporate tax rates is more effective in countries with better institutional infrastructure. Our results are robust to alternative measures of effective taxation and to the use of alternative and additional explanatory variables.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages59
Volume2010-026
Publication statusPublished - 2010

Publication series

NameTILEC Discussion Paper
Volume2010-026

Fingerprint

Income
Firm entry
Taxation
Entrepreneurship
Industry
Tax
Tax policy
Tax rate
Data base
Endogeneity
Corporate tax rates
Corporate income taxation
Corporate taxation
Institutional infrastructure
European countries
Political economy

Keywords

  • Entrepreneurship
  • Corporate income taxation
  • Incorporation
  • Political economy
  • Firm entry
  • Entry regulation
  • Panel data

Cite this

Da Rin, M., Di Giacomo, M., & Sembenelli, A. (2010). Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe. (TILEC Discussion Paper; Vol. 2010-026). Tilburg: TILEC.
Da Rin, M. ; Di Giacomo, M. ; Sembenelli, A. / Entrepreneurship, Firm Entry, and the Taxation of Corporate Income : Evidence from Europe. Tilburg : TILEC, 2010. (TILEC Discussion Paper).
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Da Rin, M, Di Giacomo, M & Sembenelli, A 2010 'Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe' TILEC Discussion Paper, vol. 2010-026, TILEC, Tilburg.

Entrepreneurship, Firm Entry, and the Taxation of Corporate Income : Evidence from Europe. / Da Rin, M.; Di Giacomo, M.; Sembenelli, A.

Tilburg : TILEC, 2010. (TILEC Discussion Paper; Vol. 2010-026).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Entrepreneurship, Firm Entry, and the Taxation of Corporate Income

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PY - 2010

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N2 - Can tax policy foster the creation of new companies? To answer this question, we assemble a novel country-industry level panel database with data on entry (by incorporation) for 17 European countries between 1997 and 2004. Our analysis is based on recent models of how corporate taxation affects firm’s incorporation decision. We compute effective average tax rates and study how the taxation of corporate income affects entry rates at the country-industry level. Drawing on the political economy literature, we account for the possible endogeneity of taxation. We find a significant negative effect of corporate income taxation on entry rates. The effect is concave and suggests that tax reductions affect entry rates only below a certain threshold tax level. We also find that a reduction in corporate tax rates is more effective in countries with better institutional infrastructure. Our results are robust to alternative measures of effective taxation and to the use of alternative and additional explanatory variables.

AB - Can tax policy foster the creation of new companies? To answer this question, we assemble a novel country-industry level panel database with data on entry (by incorporation) for 17 European countries between 1997 and 2004. Our analysis is based on recent models of how corporate taxation affects firm’s incorporation decision. We compute effective average tax rates and study how the taxation of corporate income affects entry rates at the country-industry level. Drawing on the political economy literature, we account for the possible endogeneity of taxation. We find a significant negative effect of corporate income taxation on entry rates. The effect is concave and suggests that tax reductions affect entry rates only below a certain threshold tax level. We also find that a reduction in corporate tax rates is more effective in countries with better institutional infrastructure. Our results are robust to alternative measures of effective taxation and to the use of alternative and additional explanatory variables.

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KW - Incorporation

KW - Political economy

KW - Firm entry

KW - Entry regulation

KW - Panel data

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VL - 2010-026

T3 - TILEC Discussion Paper

BT - Entrepreneurship, Firm Entry, and the Taxation of Corporate Income

PB - TILEC

CY - Tilburg

ER -

Da Rin M, Di Giacomo M, Sembenelli A. Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe. Tilburg: TILEC. 2010. (TILEC Discussion Paper).