Corporate taxes and high-quality entrepreneurship

Abstract

We examine the impact of corporate taxation on entrepreneurship, using a quasi-natural experiment, which substantially reduced the corporate tax rate for start-ups located in inland municipalities in Portugal. Using a difference-in-differences approach and IV regression, we find that the tax reform increased firm entry and new firm job creation. The entrepreneurs who took advantage of this tax reform are relatively older, and are better-educated individuals. Their start-ups are relatively larger, more productive, and are more likely to survive the first 3 years. These findings suggest that corporate taxation is an imperative constraint for entrepreneurship, particularly for high-quality entrepreneurs. These better-educated individuals find it easier to overcome the hurdles of tax legislation and to make use of the opportunities created by a specific tax reform.