Taxes Matter XI: “Taxes and Entrepreneurial Activity”


I recently came across this report published by the U.S. Small Business Administration. The report finds that:
“Marginal tax rates have significant effects on entrepreneurial entry and exit, suggesting that the formation and closure of small enterprises are in part determined by the handling of income from these activities in the tax code. The findings show that the level of entrepreneurial entry, exit, and duration react differently to changes in marginal rates on wage-and-salary and entrepreneurial income. Specifically, lower marginal tax rates on entrepreneurial income encourage more entrepreneurial entry and lower rates of exist, and lengthen the duration of spells of activity. Similarly, higher marginal rates on wage-and-salary income also increase entrepreneurial activity as more workers switch from wage-and-salary work to starting their own business. Importantly, however, the magnitude of the entry, exit, and duration effect is larger for marginal tax rates on entrepreneurial income than on wage-and-salary income.”
This finding is especially important for Maine since our economy depends more on small businesses for growth–or in Maine’s case, the lack of growth.