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Reviving American Entrepreneurship? Tax Reform and Business Dynamism

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  • SedlÃ¡Ä ek, Petr
  • Sterk, Vincent

Abstract

The 2017 Tax Cuts and Jobs Act slashed tax rates on business income and introduced immediate expensing of investments. Using a quantitative heterogeneous firms model, we investigate the long-run effects of such tax reforms on ï¬ rm dynamics. We ï¬ nd that they can substantially increase business dynamism, potentially offsetting the large decline in the U.S. startup rate observed over recent decades. This result is driven by indirect equilibrium forces: the tax reform stimulates ï¬ rm entry, leading to an increase in labor demand and wages, which in turn makes ï¬ rm selection more stringent. Related to this is a large boost of the number of ï¬ rms and of aggregate output, investment and employment.

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  • SedlÃ¡Ä ek, Petr & Sterk, Vincent, 2018. "Reviving American Entrepreneurship? Tax Reform and Business Dynamism," CEPR Discussion Papers 13073, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13073
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    Cited by:

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    2. Bilicka, Katarzyna & Raei, Sepideh, 2023. "Output distortions and the choice of legal form of organization," Economic Modelling, Elsevier, vol. 119(C).
    3. Chao, Chi-Chur & Trinh, Cong Tam & Nguyen, Xuan, 2023. "Carbon neutrality and wage inequality in a sustainable economy: New evidence from business dynamism," Economic Modelling, Elsevier, vol. 127(C).
    4. Benjamin Born & Gernot J. Müller & Moritz Schularick & Petr Sedláček, 2021. "The macroeconomic impact of Trump," Policy Studies, Taylor & Francis Journals, vol. 42(5-6), pages 580-591, November.
    5. Clementi, Gian Luca, 2019. "Comment on “Reviving American entrepreneurship? Tax reform and business dynamism” by Petr Sedláček and Vincent Sterk," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 109-113.
    6. Teegawende Zeida, 2022. "The Tax Cuts and Jobs Act (TCJA): A Quantitative Evaluation of Key Provisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 74-97, October.
    7. Neira, Julian & Singhania, Rish, 2020. "Quantifying the Effect of Corporate Taxes on the Life Cycle of Firms," MPRA Paper 99359, University Library of Munich, Germany.
    8. Jelena J. Stankoviæ & Ivana Marjanoviæ & Sandra Milanoviæ & Milica Jovanoviæ Vujatoviæ, 2022. "Determinants of entrepreneurial dynamics:The Case of the European Union," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 40(2), pages 329-351.
    9. Ábrahám, Árpád & Gottardi, Piero & Hubmer, Joachim & Mayr, Lukas, 2023. "Tax wedges, financial frictions and misallocation," Journal of Public Economics, Elsevier, vol. 227(C).
    10. Chao, Chi-Chur & Ee, Mong Shan, 2024. "Does unionization reduce wage inequality? New evidence from business dynamism," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 690-703.
    11. Philipp J. H. Schröder & Allan Sørensen, 2023. "Corporate taxation when firms are heterogeneous: ACE versus CBIT," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 396-418, April.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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