On the effectiveness of state tax and expenditure policies to encourage entrepreneurship

Abstract

Purpose The purpose of this paper is to expand the empirical literature on state tax and expenditure policies and entrepreneurial activity in several meaningful ways. Design/methodology/approach The authors update the panel data to include several more recent years and also consider other elements of state policy. Findings The most important takeaway is that even after dealing with some of the known shortcomings of dynamic panel analysis, we are still not able to find economically meaningful impacts of state tax and expenditure policies (generally defined) on entrepreneurial performance. Research limitations/implications Earlier studies that have found statistical significance have generally been limited to extensive-margin impacts on such things as self-employment rates or counts of new or small firms. When the authors examine what policy makers actually care about – things like income and employment among entrepreneurial ventures – the authors do not find much in the way of useful policy impacts. Practical implications To be sure, the authors find entrepreneurial performance to be statistically significantly related to certain tax rates and expenditure amounts, but the magnitudes of our estimated results cast serious doubts on the usefulness of these particular policy levers for generating meaningful improvements in entrepreneurial success. Originality/value The authors’ primary contribution is to improve the empirical consideration of the time series properties of the data. The authors provide a battery of more general and robust analyses to more completely surround the question.