Small Business Economics

, Volume 38, Issue 4, pp 375–397 | Cite as

Can state tax policies be used to promote entrepreneurial activity?

Article

Abstract

Despite a recent flurry of empirical research on the effects of taxes on small business activity, state-level taxes faced by entrepreneurs have been overlooked by most of the existing literature. Using a 50-state panel of tax policy information spanning the years 1989 through 2002, our analysis reveals that state tax policies generally do not appear to have quantitatively important effects on entrepreneurial activity. When we find statistically important effects, we find that higher individual income tax rates, the existence of a state-level estate, inheritance or gift tax, and a higher weight on the sales factor in the state corporate income tax apportionment formula all slightly reduce a state’s share of the national entrepreneurial stock. Results also indicate that states with more progressive personal income tax structures and states that have more aggressive corporate income taxes through the imposition of a combined reporting requirement both tend to have slightly higher entrepreneurship rates. The composition of state tax portfolios is not found to be a significant determinant of state entrepreneurship.

Keywords

State taxes Small business taxation Small business growth 

JEL Classifications

H2 H7 L26 

References

  1. Bartik, T. J. (1987). The effects of state and local government policies on the start-up of small business. In Proceedings of the 79th annual conference on taxation. National Tax Association, pp. 25–33.Google Scholar
  2. Bartik, T. J. (1989). Small business start-ups in the United States: Estimates of the effects of characteristics of states. Southern Economic Journal, 55, 1004–1018.CrossRefGoogle Scholar
  3. Bartik, T. J. (1991). Who benefits from state and local economic development policies?. Kalamazoo, Michigan: W.E. Upjohn Institute for Employment Research.Google Scholar
  4. Beale, H. B. R. (2004). Home-Based Business and Government Regulation. Report prepared for the US Small Business Administration Office of Advocacy. http://www.sba.gov/advo/research/rs235tot.pdf.
  5. Berkowitz, J., & White, M. J. (2004). Bankruptcy and small firms’ access to credit. RAND Journal of Economics, 35(1), 69–84.CrossRefGoogle Scholar
  6. Blau, D. M. (1987). A time-series analysis of self-employment in the United States. Journal of Political Economy, 95, 445–467.CrossRefGoogle Scholar
  7. Bruce, D. (2000). Effects of the United States tax system on transitions into self-employment. Labour Economics, 7(5), 545–574.CrossRefGoogle Scholar
  8. Bruce, D. (2002). Taxes and entrepreneurial endurance: evidence from the self-employed. National Tax Journal, 55(1), 5–24.Google Scholar
  9. Bruce, D., Deskins, J., & Mohsin, M. (2004). State tax policies and entrepreneurial activity: A panel data analysis. In Proceedings of the 96th annual conference on taxation, National Tax Association, pp. 325–333.Google Scholar
  10. Bruce, D., & Fox, W. F. (2000). E-commerce in the context of declining state sales tax bases. National Tax Journal, 53(4), 1373–1388.Google Scholar
  11. Bruce, D., & Gurley, T. (2005). Taxes and Entrepreneurial Activity: An Empirical Investigation Using Longitudinal Tax Return Data. Reported prepared for the US Small Business Administration Office of Advocacy. http://www.sba.gov/advo/research/rs252tot.pdf.
  12. Bruce, D., & Mohsin, M. (2006). Tax policy and entrepreneurship: New time series evidence. Small Business Economics, 26(5), 409–425.CrossRefGoogle Scholar
  13. Carlton, D. W. (1979). Why new firms locate where they do: An econometric model. In W. Wheaton (Ed.), Interregional movements and regional growth (pp. 13–50). Washington, DC: Urban Institute.Google Scholar
  14. Carroll, R., Holtz-Eakin, D., Rider, M., & Rosen, H. S. (2001). Personal income taxes and the growth of small firms. In J. Poterba (Ed.), Tax policy and the economy 15. Cambridge: MIT Press.Google Scholar
  15. Chen, J.-H., & Williams, M. (1999). The determinants of business failures in the US low-technology and high-technology industries. Applied Economics, 31, 1551–1563.CrossRefGoogle Scholar
  16. Cline, R., Neubig, T. S., & Phillips, A. (2006). Total state and local business taxes: Nationally 1980–2005, by state 2002–2005. State Tax Notes, 40(5), 373–390.Google Scholar
  17. Conway, K., & Rork, J. (2004). Diagnosis murder: The death of state ‘death’ taxes. Economic Inquiry, 42(4), 537–559.CrossRefGoogle Scholar
  18. Cowling, M., & Mitchell, P. (1997). The evolution of U.K. self-employment: A study of government policy and the role of the macroeconomy. The Manchester School, 65, 427–442.CrossRefGoogle Scholar
  19. Domar, E. D., & Musgrave, R. A. (1944). Proportional income taxation and risk-taking. Quarterly Journal of Economics, 58, 388–422.CrossRefGoogle Scholar
  20. Elias, S., Renuer, A., & Leonard, R. (1989–2002). How to File for Bankruptcy (various editions). Berkeley: Nolo Press.Google Scholar
  21. Garrett, T. A., & Wall, H. J. (2006). Creating a policy environment for entrepreneurs. Cato Journal, 26(3), 525–552.Google Scholar
  22. Gentry, W. M., & Glenn Hubbard, R. (2000). Tax policy and entrepreneurial entry. American Economic Review, 90, 283–287.CrossRefGoogle Scholar
  23. Georgellis, Y., & Wall, H. J. (2000). What makes a region entrepreneurial? Evidence from Britain. Annals of Regional Science, 34, 385–403.CrossRefGoogle Scholar
  24. Georgellis, Y., & Wall, H. J. (2006). Entrepreneurship and the policy environment. Federal Reserve Bank of St. Louis Review, 88(2), 95–111.Google Scholar
  25. Gordon, R., & Slemrod, J. (2000). Are ‘Real’ responses to taxes simply income shifting between corporate and personal tax bases? In J. Slemrod, (ed.), Does atlas shrug? The economic consequences of taxing the rich. Russell Sage Foundation and Harvard University Press, pp. 240–280.Google Scholar
  26. Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271.CrossRefGoogle Scholar
  27. Kreft, S. F. & Sobel, R. S. (2003). Public Policy, Entrepreneurship, and Economic Growth. West Virginia University Department of Economics Working Paper No. 03-02.Google Scholar
  28. Ladd, H. F. (1998). Effects of taxes on economic activity. In H. F. Ladd (primary author), Local government tax and land use policies in the Unites States. Cheltenham, UK: Edward Elgar.Google Scholar
  29. Long, J. E. (1982). Income taxation and the allocation of market labor. Journal of Labor Research, 3, 259–276.CrossRefGoogle Scholar
  30. Moore, K. (2003). The effects of the 1986 and 1993 tax reforms on self-employment. In Proceedings of the 95th annual conference on taxation. National Tax Association, pp. 323–332.Google Scholar
  31. National Association of State Development Agencies. (1989–2002). Directory of incentives for business investment and development in the United States: A state-by-state guide. Urban Institute: Washington D.C.Google Scholar
  32. Parker, S. C. (1996). A time series model of self-employment under uncertainty. Economica, 63, 459–475.CrossRefGoogle Scholar
  33. Ring, R. J., Jr. (1999). Consumer’s share and producer’s share of the general sales tax. National Tax Journal, 52(1), 79–90.Google Scholar
  34. Robson, M. T. (1998). The rise in self-employment amongst UK males. Small Business Economics, 10, 199–212.CrossRefGoogle Scholar
  35. Schuetze, H. J. (2000). Taxes, economic conditions and recent trends in male self-employment: A Canada–US comparison. Labour Economics, 7, 507–544.CrossRefGoogle Scholar
  36. Wasylenko, M. (1997). Taxation and Economic Development: The State of the Economic Literature. New England Economic Review, March/April: 37–52.Google Scholar

Copyright information

© Springer Science+Business Media, LLC. 2010

Authors and Affiliations

  1. 1.Center for Business and Economic Research and Department of EconomicsUniversity of TennesseeKnoxvilleUSA
  2. 2.Department of Economics and FinanceCreighton UniversityOmahaUSA

Personalised recommendations