Taxes, start-up costs, and innovative entrepreneurship

Abstract

Prior research investigates the role of start-up costs and taxes with regard to entrepreneurship. Yet, little distinction is made regarding the type of entrepreneurship, particularly innovative versus non-innovative entrepreneurship. We shall argue that start-up costs and taxes are associated in different ways with innovative versus non-innovative entrepreneurship. Taxes being recurring costs should mainly relate to innovative entrepreneurship, whereas start-up costs being one-off costs should mainly relate to non-innovative entrepreneurship. Analyzing a dataset of 632,116 individuals, including 43,223 entrepreneurs from 53 countries, we can partially confirm our predictions. Corporate taxes show a negative relationship with innovative entrepreneurship, whereas income taxes seem to have no relationship. High start-up costs have a positive relationship with innovative entrepreneurship, although this finding only holds true in cross-sectional investigations. Our paper contributes to the discussion on how governmental regulation and taxes relate to entrepreneurship.

Financial and Institutional Reforms for an Entrepreneurial Society

“…A policy implication of their analysis is that policies should aim to close the gender gap in STEM education at the tertiary level, but to do so, gender differences should be targeted at earlier stages of the life cycle. Darnihamedani et al (2018) take a more direct approach to innovative entrepreneurship and investigate how taxation and start-up costs affect the entrepreneurial channel for knowledge spillovers. Taxes and start-up costs (notary charges or registration) may influence knowledge diffusion by discouraging innovative entrepreneurial activity (see Blackburn and Schaper 2016 for an extensive literature review).…”

“…However, this literature largely overlooks the quality implications of such barriers. Darnihamedani et al (2018) offer additional insights by differentiating between innovative, knowledge intensive, and noninnovative entrepreneurship activity. Based on a large sample of 43,223 entrepreneurs from 53 countries, they find that corporate taxes are negatively related to innovative entrepreneurship, while income taxes are found to have no effect.…”

“…Such interventions would channel more knowledge into entrepreneurship. If coupled with high entry barriers and strong incentives (Darnihamedani et al 2018), knowledge-intensive entrepreneurship will be more innovative and productive. Everybody is not an entrepreneur and everybody should not be one.…”

Regional knowledge, entrepreneurial culture, and innovative start-ups over time and space―an empirical investigation

“…Well-designed tax policies, for example, could increase the level of entrepreneurship. In this respect, Darnihamedani et al (2018) show that governments can stimulate innovative entrepreneurship by relieving the tax burden levied against individuals and businesses that reap the rewards of innovation. Measures that could indirectly spur the public opinion about entrepreneurship are awareness campaigns (e.g., portraying of successful entrepreneurs in the media) that may trigger a positive perception of entrepreneurial behavior.…”

Small business property tax reductions and job growth

“…Small Business Economics has nurtured a robust and wide-ranging debate on the linkages between taxation or subsidies and entrepreneurial activity and this has generally found that neither is critical to future growth (Holtz-Eakin, 2000, b;Bruce and Mohsin 2006;Fotopoulos and Storey 2018). Although others who have examined general taxation rates (Baliamoune-Lutz and Garello 2014), corporation and income taxation (Nam and Radulescu 2007;Darnihamedani et al 2018) or innovative forms of support (Henrekson and Sanandaji 2018) have identified institutional sets up in which tax (subsidy) incentives can assist start up or investment decisions. We extend this debate in a new direction through our examination of property taxes and job growth.…”