Taxes and Their Impact on Entrepreneurs and Their Businesses

This article explores how income tax policy affects innovation by focusing on how it impacts encouraging innovation, quantity & quality of new ideas & creation of companies & productivity.

Taxes and Their Impact on Entrepreneurs and Their Businesses

Personal income taxes, capital gains taxes, and payroll taxes all take away valuable capital from individual entrepreneurs. The higher the tax rate, the more money is taken away from the businessman and given to the government. This article will explore the most recent academic findings on how income tax policy, both at the personal and corporate levels, affects innovation. We will focus on the impact of tax policy on encouraging innovation, the quantity and quality of new ideas, and the creation of companies and productivity.

Research shows that both high income tax rates and inefficient tax structures can have a negative effect on innovation and entrepreneurship.

Companies or entrepreneurs will only enter a new business if they expect profits to exceed their fixed operating costs.

Therefore, corporate taxes not only affect business activity, but also influence the allocation of resources between the formal and informal sectors. Grants for new businesses, reductions in administrative burdens or business education can all help. In addition, research suggests that the design of the tax code is just as important as the highest income figure.

Replacing current personal and corporate income taxes with a fixed 20 percent tax would nearly triple the amount of business activity.

Studies have found that corporate income taxes not only influence the size of new companies, but also their capacity for innovation. The empirical results support this statement; they find that the effects of corporate taxes on business activity depend on the quality of the accounting system. Similarly, profits from a company or property are subject to payroll tax, but losses are not deductible from payroll tax.

This means entrepreneurs will be left with a smaller amount of their profits than their losses. A certain degree of taxation is necessary to finance government functions and make beneficial public investments in the future. A study analyzing 632,116 people, including 43,223 businessmen from 53 countries, shows that high levels of corporate income taxes reveal a negative relationship with innovative entrepreneurship. Opportunity entrepreneurs versus entrepreneurs out of necessity (entrepreneurs who start their business because they see a profitable business opportunity versus entrepreneurs who start their business out of necessity). Low-tech entrepreneurship versus high-tech entrepreneurship (entrepreneurship in low-tech sectors versus entrepreneurs in high-tech sectors).

In addition to working papers, the NBER disseminates its members' latest findings through a series of free periodicals (NBER Reporter, NBER Digest, Bulletin on Retirement and Disability, Bulletin on Health and Bulletin on Entrepreneurship), as well as online conference reports, video conferences and interviews. Differences in the tax treatment of gains and losses can also have strong effects on incentives to choose a riskier occupation. In addition to measuring entrepreneurship (often measured through “entrepreneurship rates”), there are different types of entrepreneurship. In the United States, for example, the statutory corporate tax rate is 45.2%, while its effective corporate income tax rate is only 18.2%.Taxes can have a significant impact on entrepreneurs and their businesses. High income tax rates and inefficient tax structures can discourage innovation and entrepreneurship.

It is important to consider not only the highest income figure but also how taxes are structured when designing a tax code. Replacing current personal and corporate income taxes with a fixed 20 percent tax could nearly triple business activity. Payroll taxes also take away capital from entrepreneurs leaving them with less money than their losses. It is essential to understand how taxes affect different types of entrepreneurship in order to create an effective policy.