The Cost of Creation Do Income Taxes Influence Small Retail Entrepreneurship

Abstract

A common concern about tax policies is their influences on entrepreneurial activity. Basic theory of taxation posits that a tax alters individual behavior, often yielding less output than in the absence of the tax. Income taxes may provide a disincentive to work, and they also limit an individual's total capital in the absence of the income tax. This likely decreases the total amount one has to invest in businesses and entrepreneurial activities. This study examines the relationship between income taxation and entrepreneurship. It utilizes a panel dataset constructed from the Census Bureau's Statistics of United States Businesses as well as Tax Foundation's dataset on state income taxes in addition to other datasets on state and federal taxes, federal loan expenditures and state populations. Using OLS, random and fixed effects regressions, this paper will examine the hypothesis that there is a negative relationship between small retail establishment creation and U.S. State personal income tax rates for the years 1998 to 2007. The findings are inconclusive indicating that, while income tax may influence small retail firm birth, there are likely other significant influential factors as well. A combination of state tax policies may potentially impact retail establishment birth while access to start-up capital is a significant variable for entrepreneurs. Policies crafted to encourage retail entrepreneurship should focus on all facets of tax reform as well as factors that impact access to capital.