Foundations and Trends in Entrepreneurship
2 total works
Owner-Level Taxes and Business Activity
by Magnus Henrekson and Tino Sanandaji
Published 17 March 2016
Owner-Level Taxes and Business Activity examines advances in both theoretical and empirical research that paint a clearer picture of the effects of owner-level taxation on business activity. Commonly used macroeconomic models tend to find that taxes at the owner level are "neutral" and have little or no effect on firm activity. However, the conclusion that ownership taxation has no effect on firm behaviour - and on entrepreneurship - is derived from models based on unrealistic simplifications. When complex and more realistic dimensions such as entrepreneurship and corporate governance are incorporated into these models, taxes can affect business activity through these channels. A key lesson from this monograph is that the models used in economics are necessarily simplified. Moreover, it is important for political decision makers to be conscious of these simplifications when the conclusions derived from economic models motivate or are used to justify tax policy decisions. Conclusions from overly simplified models - such as the model that concludes that dividend taxes do not influence firm behaviour - may thus change when additional factors are considered.
Formal economic institutions that have been identified as particularly important for entrepreneurship include the protection of private property, tax codes, social insurance systems, employment protection legislation, competition policy, trade policies, capital market regulation, contract enforcement, and law and order. Yet much remains to be learned concerning the relationship between institutions and entrepreneurship. Entrepreneurship and Institutions: A Bidirectional Relationship argues that the view that institutions determine the extent to which entrepreneurial activity is productive is only part of the story. Rather, causality is bidirectional, in that entrepreneurship is also, for better or for worse, one of the main drivers of institutional change. After a brief introduction, Section 2 provides a precursory framework for institutions as functional responses to deviations, followed by an introduction of the idea of entrepreneurs as deviators. Section 3 begins by categorizing the three entrepreneurial responses to institutions—abides, alter and evade—before discussing the first two at greater length. The subsequent two sections are devoted to evasive entrepreneurship with Section 4 defining the concept and discussing the institutional features that make it possible, while Section 5 describes its economic consequences and its potential to usher in institutional change. Section 6 concludes by discussing the implications of this work for policy and future research.