Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 813: Taxation and the Quality of Entrepreneurship

Andrea Asoni () and Tino Sanandaji ()
Additional contact information
Andrea Asoni: Research Institute of Industrial Economics (IFN), Postal: and University of Chicago
Tino Sanandaji: Research Institute of Industrial Economics (IFN), Postal: and University of Chicago

Abstract: We study the effect of taxation on entrepreneurship, taking into account both the amount of entry and the quality of new ventures. We show that even with risk neutral agents and no tax evasion progressive taxes can increase entrepreneurial entry, while reducing average firm quality. So called "success taxes" increase startup of lower value business ideas by reducing the option value of pursuing better projects. This suggests that the most common measure used in the literature, the likelihood of entry into self-employment, may underestimate the adverse effect of taxation.

Keywords: Taxation; Entrepreneurial Entry; Quality of Entrepreneurial Firms

JEL-codes: H24; H25; L26

46 pages, First version: November 13, 2009. Revised: October 30, 2013.

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