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CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology KTH/CESIS Working Paper Series in Economics and Institutions of Innovation

No 312:
Taxes, tax administrative burdens and new firm formation

Pontus Braunerhjelm () and Johan E. Eklund ()

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; (follow links to similar papers)

JEL-Codes: D22; H20; K20; L26; L51; (follow links to similar papers)

22 pages, May 27, 2013

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This paper is published as:
Braunerhjelm, Pontus and Johan E. Eklund, (2014), 'Taxes, tax administrative burdens and new firm formation', Kyklos, pages 1-11



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