Entrepreneurial Innovations and Taxation

44 Pages Posted: 30 Apr 2012

See all articles by Lars Persson

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Andreas Haufler

University of Munich - Seminar for Economic Policy; CESifo (Center for Economic Studies and Ifo Institute)

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2, 2012

Abstract

Many governments promote small businesses for the dual reasons of fostering ‘breakthrough’ innovations and employment growth. In this paper we study the effects of tax and subsidy policies on entrepreneurs’ choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.

Keywords: entrepreneurship, innovation, corporate taxes, firm growth

JEL Classification: H25, L13, M13, O3

Suggested Citation

Persson, Lars and Haufler, Andreas and Norbäck, Pehr-Johan, Entrepreneurial Innovations and Taxation (January 2, 2012). IFN Working Paper No. 896, Available at SSRN: https://ssrn.com/abstract=2048215 or http://dx.doi.org/10.2139/ssrn.2048215

Lars Persson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andreas Haufler

University of Munich - Seminar for Economic Policy ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

HOME PAGE: http://www.ecpol.vwl.uni-muenchen.de

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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