Taxes, corruption, and entry

Abstract

Tax policies and corruption are important institutional considerations which can shape entrepreneurship. We investigate how tax rates, and the interaction between corruption and tax rates, influence variations in entry across a panel of 72 countries in the period 2005-2011. We use a series of panel estimations as well as several robustness checks to test these effects, using relevant controls for economic development, the size of the state, and other regulatory and tax policy measures. We find that higher tax rates consistently discourage entry. Further, we find that although the direct influence of corruption on entry is also consistently negative, the interaction influence of corruption and tax rate is positive. This indicates that corruption can offset the negative influence of high taxes on entry. We discuss the implications of our findings for policymakers and future research.

Institutional drivers of high-growth firms: country-level evidence from 26 transition economies

“…These firms are more likely to be large firms, putting small or potential new firms at a disadvantage. Third, policymakers should devote attention to understanding how corruption unfolds (Belitski et al 2016;Dutta and Sobel 2016) in their specific ecosystem. In order to develop more effective and appropriate anticorruption strategies (Tonoyan et al 2010), a high priority for many transition economies, knowing if corruption greases or sands the wheels for HGFs can be very useful.…”

“…These can include customs, traditions, social norms, religious ideals and can be categorized as slow to change and ''sticky'' (Williamson 2000). In a transition country, these are likely to include corruption (Estrin et al 2013), which can become common practice and deeply entrenched (Belitski et al 2016). Informal business practices also reflect informal institutions.…”

“…This could be because of non-efficient and inadequate formal institutions left from communist rule, as well as inadequate or problematic institutional reform in the transition period. A weak or ineffective formal institutional environment can put more pressure on informal institutions to regulate behavior (see Belitski et al 2016;North 1990). This could include corruption, reliance on political connections to obtain favors for public tenders, conducting business informally due to state rent-seeking, as well as unchecked anticompetitive behavior by other firms.…”

“…It can contribute to an anticompetitive environment in which the market fails to allocate resources efficiently, since some actors can operate outside the law but some will operate inside the law (see Belitski et al 2016;Dutta and Sobel 2016). There are advantages and disadvantages to both in a transition economy.…”

“…A larger bureaucratic apparatus could increase public oversight in a good way, but it could also give greater power to government agents and thus facilitate corruption (Belitski et al 2016;Fogel 2006).…”