Entrepreneurship and the Policy Environment

Abstract

Investigates the effects of marginal income tax ratesand bankruptcy exemptions on entrepreneurship rates. After a discussion ofspatial and temporal trends in United States entrepreneurship, an empiricalmodel is used to estimate state rates of entrepreneurship. A state-level paneldata set that covers the period between 1991 and 1998 is used to evaluate themodel. This panel approach reveals a U-shaped relationship between marginal taxrates and entrepreneurship: at low initial tax levels, an increase in marginaltax rates reduces the number of entrepreneurs; at high initial tax levels, thenumber of entrepreneurs rises. Also, an S-shaped relationship exists betweenthe homestead exemption and entrepreneurship. In other words, an increase inthe homestead exemption from very low or very high levels acts to reduce thenumber of entrepreneurs, while an increase in the middle range acts to increasethe number of entrepreneurs. (SAA)