Do Tax Rates Matter for Entrepreneurial Motivations? An Empirical Approach

Abstract

There are a number of factors that can hinder the path of entrepreneurship development and the literature highlighted the fact that taxes are one of the most important barriers for entrepreneurs. This paper aims at identifying the relationship between tax rates and entrepreneurship and to establish the impact of tax rates on entrepreneurs considering their motivations (necessity, opportunity or improvement-driven opportunity). The research focuses on a sample of 46 countries grouped according to their income level, for a period of eight years (2012-2019). In order to test our hypotheses, we use multiple linear regression based on balanced panel data and we consider, as dependent variables, indicators that measure entrepreneurship and entrepreneurial motivations (early-stage entrepreneurial activity, necessity-driven entrepreneurs, opportunity-driven entrepreneurs, improvement-driven opportunity entrepreneurs, and motivational index). As independent variables, we consider indicators that measure the tax rates supported by entrepreneurs (total tax and contribution rate, profit tax, labor tax and contributions, and other taxes payable by businesses). The results show that tax rates play a key role in fostering the creation of new companies. Moreover, the impact is different, depending on the entrepreneurs’ motivations. Entrepreneurs motivated by necessity are positively related to total tax and contribution rate, while those motivated by opportunity are negatively related with this indicator. Therefore, tax rates discourage the entrepreneurs that seek innovation, but they do not affect those that do not have other options to obtain the necessary income for living.