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Corporate Taxation and the Size of New Firms: Evidence from Europe

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  • Marco Da Rin
  • Marina Di Giacomo
  • Alessandro Sembenelli

Abstract

Using a novel country-industry level panel database with information on newly incorporated firms in 17 European countries between 1997 and 2004, we study how taxation of corporate income affects the size of entrants at the country-industry level. Our results, which are robust to changes in several assumptions, suggest that a one-unit reduction in the effective corporate income tax rate leads to a reduction of entrants' capital size that ranges from 2.7% to 14.4%. Results on labor size are more mixed in terms of both sign and size. These findings imply that a reduction in corporate taxation reduces the capital to labor ratio. (JEL: C23, H32, L26, L51, M13) (c) 2010 by the European Economic Association.

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  • Marco Da Rin & Marina Di Giacomo & Alessandro Sembenelli, 2010. "Corporate Taxation and the Size of New Firms: Evidence from Europe," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 606-616, 04-05.
    • Handle: RePEc:tpr:jeurec:v:8:y:2010:i:2-3:p:606-616
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    1. Da Rin, M. & Di Giacomo, M. & Sembenelli, A., 2009. "Entrepreneurship, Firm Entry, and the Taxation of Corporate Income : Evidence from Europe (Revised version of DP 2008-65)," Other publications TiSEM aae0d3e7-9687-4d96-b534-6, Tilburg University, School of Economics and Management.
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    3. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2010. "The Effect of Corporate Taxes on Investment and Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 31-64, July.
    4. William R. Kerr & Ramana Nanda, 2010. "Banking Deregulations, Financing Constraints, and Firm Entry Size," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 582-593, 04-05.
    5. Kerr, William R. & Nanda, Ramana, 2009. "Democratizing entry: Banking deregulations, financing constraints, and entrepreneurship," Journal of Financial Economics, Elsevier, vol. 94(1), pages 124-149, October.
    6. Silvia Ardagna & Annamaria Lusardi, 2009. "Where does regulation hurt? Evidence from new businesses across countries," NBER Working Papers 14747, National Bureau of Economic Research, Inc.
    7. Michael P. Devereux & Rachel Griffith, 1998. "The Taxation of Discrete Investment Choices," Keele Department of Economics Discussion Papers (1995-2001) 98/08, Department of Economics, Keele University.
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    Cited by:

    1. Fatica, Serena, 2009. "Taxation and the quality of institutions: asymmetric effects on FDI," MPRA Paper 24179, University Library of Munich, Germany, revised Jun 2010.
    2. Alex Coad & Julian Frankish & Paul Nightingale & Richard Roberts, 2014. "Business experience and start-up size: Buying more lottery tickets next time around?," Small Business Economics, Springer, vol. 43(3), pages 529-547, October.
    3. Sean Mc Auliffe & Georg U. Thunecke & Georg Wamser, 2023. "The Tax-Elasticity of Tangible Fixed Assets: Evidence from Novel Corporate Tax Data," CESifo Working Paper Series 10628, CESifo.
    4. Ana Venâncio & Victor Barros & Clara Raposo, 2022. "Corporate taxes and high-quality entrepreneurship," Small Business Economics, Springer, vol. 58(1), pages 353-382, January.
    5. Hayato Kato & Hirofumi Okoshi, 2022. "Economic Integration And Agglomeration Of Multinational Production With Transfer Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 1325-1355, August.
    6. Jose Alves, 2019. "The impact of tax structure on investment: an empirical assessment for OECD countries," Public Sector Economics, Institute of Public Finance, vol. 43(3), pages 291-309.
    7. Margit Schratzenstaller-Altzinger & Fanny Dellinger, 2017. "Genderdifferenzierte Lenkungswirkungen des Abgabensystems," WIFO Studies, WIFO, number 60797.
    8. Da Rin, Marco & Penas, Maria, 2015. "Venture Capital and Innovation Strategies," Other publications TiSEM 6aaa2b8c-d388-4a92-9835-e, Tilburg University, School of Economics and Management.
    9. Sergio Galletta & Agustin Redonda, 2017. "Corporate flat tax reforms and businesses’ investment decisions: evidence from Switzerland," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 962-996, December.
    10. Richard Kneller & Danny McGowan, 2011. "Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries," Discussion Papers 11/08, University of Nottingham, School of Economics.
    11. Jörn Block, 2021. "Corporate income taxes and entrepreneurship," IZA World of Labor, Institute of Labor Economics (IZA), pages 257-257, July.
    12. Da Rin, Marco & Di Giacomo, Marina & Sembenelli, Alessandro, 2011. "Entrepreneurship, firm entry, and the taxation of corporate income: Evidence from Europe," Journal of Public Economics, Elsevier, vol. 95(9), pages 1048-1066.
    13. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
    14. Marco Da Rin & María Fabiana Penas, 2017. "Venture capital and innovation strategies," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 26(5), pages 781-800.
    15. Stefan Lutz, 2012. "Effects of taxation on European multi-nationals’ financing and profits," Economics Discussion Paper Series 1214, Economics, The University of Manchester.
    16. Can, Ege & Fossen, Frank M., 2023. "Income Taxation and Hours Worked in Different Types of Entrepreneurship," IZA Discussion Papers 16683, Institute of Labor Economics (IZA).
    17. Peter Huber & Harald Oberhofer & Michael Pfaffermayr, 2014. "Job creation and the intra-distribution dynamics of the firm size distribution," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 23(1), pages 171-197, February.
    18. Haufler, Andreas & Norbäck, Pehr-Johan & Persson, Lars, 2014. "Entrepreneurial innovations and taxation," Journal of Public Economics, Elsevier, vol. 113(C), pages 13-31.
    19. Ant Bozkaya & William R. Kerr, 2009. "Labor Regulations and European Private Equity," Working Papers CEB 09-055.RS, ULB -- Universite Libre de Bruxelles.
    20. Malevergne, Y. & Saichev, A. & Sornette, D., 2013. "Zipf's law and maximum sustainable growth," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1195-1212.
    21. Silvia Ardagna & Annamaria Lusardi, 2010. "Heterogeneity in the Effect of Regulation on Entrepreneurship and Entry Size," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 594-605, 04-05.
    22. Javier Garcia-Bernardo & Petr Janský & Thomas Tørsløv, 2022. "Decomposing Multinational Corporations’ Declining Effective Tax Rates," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(2), pages 338-381, June.
    23. Da Rin, Marco & Di Giacomo, M. & Sembenelli, A., 2018. "Corporate Income Taxation, Leverage at Entry, and the Growth of Entrepreneurial Companies," Other publications TiSEM 4a62ae1b-5817-4a73-8635-e, Tilburg University, School of Economics and Management.
    24. Sean Mc Auliffe & Georg U. Thunecke & Georg Wamser, 2023. "The Tax-Elasticity of Tangible Fixed Assets: Heterogeneous Effects of Homogeneous Tax Policy Changes," Working Papers tax-mpg-rps-2023-25, Max Planck Institute for Tax Law and Public Finance.

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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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