Entrepreneurship and State Taxation

Abstract

Entrepreneurship plays a vital role in the economy, yet there exists little well-identified research into the effects of taxes on startup activity. Using recently developed county-level data on startups, we examine the effect of states' corporate, personal and sales tax rates on new firm activity and test for cross-border spillovers in response to these policies. We find that new firm employment is negatively-and disproportionately-affected by corporate tax rates. We find little evidence of an effect of personal and sales taxes on entrepreneurial outcomes. Our results are robust to changes in the tax base and other state-level policies.JEL Codes: L26, D22, H71, H25, J23

Unintended Side Effects: Stress Tests, Entrepreneurship, and Innovation

“…14 To shed light on the role of young firms, I use data on the county-industry-year level on end-of-quarter employment by firm age groups, provided by the Quarterly Workforce Indicators (QWI). I follow the literature and define young firms or entrepreneurs as firms aged zero to one (Gourio, Messer and Siemer, 2016;Curtis and Decker, 2018). For each two digit industry in 13 For more details on variable construction and sample size, see the Data Appendix.…”

“…34 Firm entry contributes around one-third to aggregate TFP growth (Decker, Haltiwanger, Jarmin and Miranda, 2014;Haltiwanger, 2015;Alon, Berger, Pugsley and Dent, 2018;Curtis and Decker, 2018).…”

“…For other papers using QWI data on firm age, seeAdelino, Ma and Robinson (2017);Curtis and Decker (2018). Note that the data classifies subsidiaries of existing firms as start-ups whenever they are formed as separate legal entities.…”

Entrepreneurial Spillovers from Corporate R&D

“…Second, numerous studies, including ours, find no direct association between changes in federal and state-level R&D tax credits and new firm formation. For example, while Lucking (2018) shows that state R&D tax credits lead to innovation-induced employment growth in new establishments of incumbent firms, there is no effect on new firms (see also Wilson 2009 andCurtis &. In sum, R&D tax credits are not directly useful for startups, but may indirectly affect new firm formation through the channel of corporate R&D, the outputs of which may depart the firm from various establishment types, including headquarters, manufacturing plants, and laboratories.…”

Do Corporate Tax Cuts Increase Income Inequality?

“…Third, there is significant cross-sectional variation in state-level corporate tax changes during our sample period. A resurgent literature has leveraged these facts to provide analyses of the effects of state taxes on firm location (Giroud and Rauh, 2018), corporate debt (Heider and Ljungqvist, 2015a), employment (Ljungqvist and Smolyansky, 2015), entrepreneurship (Curtis and Decker, 2018), tax revenues (Suárez Serrato and Zidar, 2017), investment (Ohrn, 2016), tax harmonization (Fajgelbaum et al, 2015), income shifting (DeBacker et al, 2017), and innovation (Akcigit et al, 2018) among others. This paper is also related to a literature measuring the rise in income inequality over time (Piketty and Saez, 2003).…”