Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 896: Entrepreneurial Innovations and Taxation

Andreas Haufler (), Pehr-Johan Norbäck () and Lars Persson ()
Additional contact information
Andreas Haufler: University of Munich, Postal: and CESifo
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: Many governments promote small businesses for the dual reasons of fostering ‘breakthrough’ innovations and employment growth. In this paper we study the effects of tax and subsidy policies on entrepreneurs’ choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.

Keywords: Entrepreneurship; Innovation; Corporate taxes; Firm growth

JEL-codes: H25; L13; M13; O31

43 pages, January 2, 2012

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