Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe

Journal of Public Economics, vol. 95, N. 9-10, pp.1048-1066, October 2011

TILEC Discussion Paper No. 2010-026

59 Pages Posted: 3 Sep 2008 Last revised: 4 Apr 2016

See all articles by Marco Da Rin

Marco Da Rin

Tilburg University, Department of Finance; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)

Marina Di Giacomo

University of Torino - Department of Economics, Social Sciences, Applied Mathematics and Statistics

Alessandro Sembenelli

University of Turin - Department of Economics and Financial Sciences G. Prato

Date Written: July 29, 2009

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.

Keywords: Entrepreneurship, Corporate income taxation, Incorporation, Political economy, Firm entry, Entry regulation, Panel data

JEL Classification: C23, H32, L51, M13

Suggested Citation

Da Rin, Marco and Di Giacomo, Marina and Sembenelli, Alessandro, Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe (July 29, 2009). Journal of Public Economics, vol. 95, N. 9-10, pp.1048-1066, October 2011, TILEC Discussion Paper No. 2010-026, Available at SSRN: https://ssrn.com/abstract=1262204 or http://dx.doi.org/10.2139/ssrn.1262204

Marco Da Rin (Contact Author)

Tilburg University, Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Marina Di Giacomo

University of Torino - Department of Economics, Social Sciences, Applied Mathematics and Statistics ( email )

Corso Unione Sovietica 218 bis
Torino, 10134
Italy
+39 011 6706074 (Phone)
+39 011 6706062 (Fax)

HOME PAGE: http://www.unito.it/persone/madigiac

Alessandro Sembenelli

University of Turin - Department of Economics and Financial Sciences G. Prato ( email )

C. so Unione Sovietica, 218 Bis
Torino, 13820-4020
Italy
+39 011 670 6059 (Phone)
+39 011 670 6062 (Fax)

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