Journal of Economics

, Volume 113, Issue 2, pp 101–123 | Cite as

Taxation and the quality of entrepreneurship

Article

Abstract

We study the effect of taxation on entrepreneurship, investigating how taxes affect both the number of start-ups and their average quality. We show theoretically 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” encourage start-ups with 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 Classification

H24 H25 L26 

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Copyright information

© Springer-Verlag Wien 2013

Authors and Affiliations

  1. 1.Charles River AssociatesWashingtonUSA
  2. 2.IFN, Research Institute of Industrial EconomicsStockholmSweden

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