Small Business Economics

, Volume 47, Issue 1, pp 201–216 | Cite as

Taxes, corruption, and entry

  • Maksim Belitski
  • Farzana ChowdhuryEmail author
  • Sameeksha Desai


Tax policies and corruption are important institutional considerations which can shape entrepreneurship. We investigate how tax rates, and the interaction between corruption and tax rates, influence variations in entry across a panel of 72 countries in the period 2005–2011. We use a series of panel estimations as well as several robustness checks to test these effects, using relevant controls for economic development, the size of the state, and other regulatory and tax policy measures. We find that higher tax rates consistently discourage entry. Further, we find that although the direct influence of corruption on entry is also consistently negative, the interaction influence of corruption and tax rate is positive. This indicates that corruption can offset the negative influence of high taxes on entry. We discuss the implications of our findings for policymakers and future research.


Corporate tax Tax administration Entrepreneurship Corruption Institution 

JEL Classifications

L26 H29 O50 



We thank David Audretsch, Johan Eklund, Magnus Henrekson, and participants at Academy of International Business for comments. Farzana Chowdhury thanks Erik Stam and Siri Terjesen.


  1. Ács, Z. J., Autio, E., & Szerb, L. (2014). National systems of entrepreneurship: Measurement issues and policy implications. Research Policy, 43(3), 476–494.CrossRefGoogle Scholar
  2. Acs, Z. J., Braunerhjelm, P., Audretsch, D. B., & Carlsson, B. (2009). The knowledge spillover theory of entrepreneurship. Small Business Economics, 32(1), 15–30.CrossRefGoogle Scholar
  3. Acs, Z. J., Desai, S., & Klapper, L. F. (2008). What does “entrepreneurship” data really show? Small Business Economics, 31(3), 265–281.CrossRefGoogle Scholar
  4. Aidis, R., Estrin, S., & Mickiewicz, T. (2012). Size matters: Entrepreneurial entry and government. Small Business Economics, 39, 119–139.CrossRefGoogle Scholar
  5. Alm, J. (2012). Measuring, explaining, and controlling tax evasion: Lessons from theory, experiments, and field studies. International Tax and Public Finance, 19(1), 54–77.CrossRefGoogle Scholar
  6. Anokhin, S., & Schulze, W. S. (2009). Entrepreneurship, innovation, and corruption. Journal of Business Venturing, 24(5), 465–476.CrossRefGoogle Scholar
  7. Appelbaum, E., & Katz, E. (1996). Corporate taxation, incumbency advantage and entry. European Economic Review, 40, 1817–1828.CrossRefGoogle Scholar
  8. Arum, R., & Müller, W. (2004a). The return of self-employment: A cross-national study of self-employment and social inequality. Princeton: Princeton University Press.Google Scholar
  9. Arum, R., & Müller, W. (2004b). The reemergence of self-employment: Comparative findings and empirical propositions. In R. Arum & W. Müller (Eds.), The reemergence of self-employment. A comparative study of self-employment dynamics and social inequality (pp. 426–454). Princeton, Oxford: Princeton University Press.Google Scholar
  10. Audretsch, D. B., & Belitski, M. (2013). The missing pillar: The creativity theory of knowledge spillover entrepreneurship. Small Business Economics, 41(4), 819–836.CrossRefGoogle Scholar
  11. Audretsch, D., Belitski, M., & Desai, S. (2015). Entrepreneurship and economic development in cities. Annals of Regional Sciences, 55(1), 33–60.CrossRefGoogle Scholar
  12. Audretsch, D. B., & Feldman, M. P. (1996). R&D spillovers and the geography of innovation and production. The American Economic Review, 86, 630–640.Google Scholar
  13. Audretsch, D. B., & Lehmann, E. E. (2005). Does the knowledge spillover theory of entrepreneurship hold for regions? Research Policy, 34(8), 1191–1202.CrossRefGoogle Scholar
  14. Bacher, H. U., & Brülhart, M. (2010). Progressive taxes and firm births. Working paper, CEPR DP7830.
  15. Baker, T., Gedajlovic, E., & Lubatkin, M. (2005). A framework for comparing entrepreneurship processes across nations. Journal of International Business Studies, 36(5), 492–504.CrossRefGoogle Scholar
  16. Baliamoune-Lutz, M. (2015). Taxes and entrepreneurship in OECD countries. Contemporary Economic Policy, 33(2), 369–380.CrossRefGoogle Scholar
  17. Baliamoune-Lutz, M., & Garello, P. (2014). Tax structure and entrepreneurship. Small Business Economics, 42, 165–190.CrossRefGoogle Scholar
  18. Baumol, W. J. (1990). Entrepreneurship, productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893–921.CrossRefGoogle Scholar
  19. Belitski, M., & Desai, S. (2015). What drives ICT clustering in European cities? The Journal of Technology Transfer. doi: 10.1007/s10961-015-9422-y
  20. Blanchflower, D. G. (2004). Self-employment: More may not be better. No. w10286. National Bureau of Economic Research.Google Scholar
  21. Blanchflower, D., & Oswald, A. (1990). What makes a young entrepreneur? No. 373.Google Scholar
  22. Blau, D. (1987). A time series analysis of self-employment in the United States. Journal of Political Economy, 95, 223–239.CrossRefGoogle Scholar
  23. Bologna, J., & Ross, A. (2015). Corruption and entrepreneurship: Evidence from a random audit program. No. 15-05.Google Scholar
  24. Braithwaite, J. (2006). Responsive regulation and developing economies. World Development, 34(5), 884–898.CrossRefGoogle Scholar
  25. Bruce, D. (2000). Effects of the United States tax system on transitions into self-employment. Labour Economics, 7(5), 545–574.CrossRefGoogle Scholar
  26. Bruce, D. (2002). Taxes and entrepreneurial endurance, evidence from the self-employed. National Tax Journal, 54(1), 5–24.CrossRefGoogle Scholar
  27. Bruce, D., & Mohsin, M. (2006). Tax policy and entrepreneurship: New time series evidence. Small Business Economics, 26(5), 409–425.CrossRefGoogle Scholar
  28. Campos, N., Dimova, R., & Saleh, A. (2010). Whither corruption? A quantitative survey of the literature on corruption and growth. CEPR discussion paper no. 8140.Google Scholar
  29. Carree, M., van Stel, A., Thurik, R., & Wennekers, S. (2002). Economic development and business ownership: An analysis using data of 23 OECD countries in the period 1976–1996. Small Business Economics, 19, 271–290.CrossRefGoogle Scholar
  30. Carroll, R., Holtz-Eakin, D., Rider, M., & Rosen, H. S. (2001). Personal income taxes and the growth of small firms. In J. Poterba (Ed.), Tax policy and the economy (Vol. 15, pp. 121–147). Cambridge, MA: MIT Press.Google Scholar
  31. Chowdhury, F., Desai, S., Audretsch, D. B., & Belitski, M. (2015). Does corruption matter for international entrepreneurship? International Entrepreneurship and Management Journal, 11(4), 959–980.CrossRefGoogle Scholar
  32. Coase, R. H. (1960). The problem of social cost (pp. 87–137). London: Palgrave Macmillan.Google Scholar
  33. Cuervo-Cazurra, A. (2006). Who cares about corruption? Journal of International Business Studies, 37(6), 807–822.CrossRefGoogle Scholar
  34. Cullen, J. B., & Gordon, R. H. (2007). Taxes and entrepreneurial risk-taking: Theory and evidence for the US. Journal of Public Economics, 91(7), 1479–1505.CrossRefGoogle Scholar
  35. Da Rin, M., Di Giacomo, M., & Sembenelli, A. (2011). Entrepreneurship, firm entry, and the taxation of corporate income: Evidence from Europe. Journal of Public Economics, 95(9), 1048–1066.CrossRefGoogle Scholar
  36. Davis, S. J., & Henrekson, M. (1999). Explaining national differences in the size and industry distribution employment. Small Business Economics, 12(1), 59–83.CrossRefGoogle Scholar
  37. Desai, S., Acs, Z., & Weitzel, U. (2013). A model of destructive entrepreneurship insight for conflict and postconflict recovery. Journal of Conflict Resolution, 57(1), 20–40.CrossRefGoogle Scholar
  38. Djankov, S., Ganser, T., McLiesh, C., Ramalho, R., & Shleifer, A. (2010). The effect of corporate taxes on investment and entrepreneurship. American Economic Journal: Macroeconomics, 2, 31–64.Google Scholar
  39. Djankov, S., LaPorta, R., Lopez-De-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics CXVII, 1, 1–36.CrossRefGoogle Scholar
  40. Doerrenberg, P., & Peichl, A. (2013). Progressive taxation and tax morale. Public Choice, 155(3–4), 293–316.CrossRefGoogle Scholar
  41. Domar, E. D., & Musgrave, R. A. (1944). Proportional income taxation and risk-taking. Quarterly Journal of Economics, 58(3), 388–422.CrossRefGoogle Scholar
  42. Dreher, A., & Gassebner, M. (2013). Greasing the wheels? The impact of regulations and corruption on new firm entry. Public Choice, 155(3–4), 1–20.Google Scholar
  43. Estrin, S., Korosteleva, J., & Mickiewicz, T. (2013). Which institutions encourage entrepreneurial growth aspirations? Journal of Business Venturing, 28, 564–580.CrossRefGoogle Scholar
  44. Estrin, S., Meyer, K. E., & Bytchkova, M. (2006). Entrepreneurship in transition economies. In M. C. Casson, et al. (Eds.), The Oxford Handbook of Entrepreneurship. Oxford: Oxford University Press.Google Scholar
  45. Evans, D. S., & Leighton, L. S. (1989a). Some empirical aspects of entrepreneurship. The American Economic Review, 79(3), 519–535.Google Scholar
  46. Evans, D. S., & Leighton, L. S. (1989b). The determinants of changes in US self-employment, 1968–1987. Small Business Economics, 1(2), 111–119.CrossRefGoogle Scholar
  47. Fölster, S. (2002). Do lower taxes stimulate self-employment? Small Business Economics, 19, 135–145.CrossRefGoogle Scholar
  48. Fossen, F., & Steiner, V. (2009). Income taxes and entrepreneurial choice: Empirical evidence from two German natural experiments. Empirical Economics, 36, 487–513.CrossRefGoogle Scholar
  49. Fritsch, M., & Schroeter, A. (2011). Why does the effect of new business formation differ across regions? Small Business Economics, 36, 383–400.CrossRefGoogle Scholar
  50. Gentry, W. M., & Hubbard, R. G. (2000). Tax policy and entrepreneurial entry. The American Economic Review, 90(2), 283–287.CrossRefGoogle Scholar
  51. Gentry, W. M., & Hubbard, R. G. (2004). Success taxes, entrepreneurial entry, and innovation (Vol. 10551). NBER working paper.Google Scholar
  52. Gordon, R., & Li, W. (2009). Tax structures in developing countries: Many puzzles and a possible explanation. Journal of Public Economics, 93(7), 855–866.CrossRefGoogle Scholar
  53. Gurley-Calvez, T., & Bruce, D. (2013). Do tax rate cuts encourage entrepreneurial entry? Journal of Entrepreneurship and Public Policy, 2(2), 178–202.CrossRefGoogle Scholar
  54. Hansson, Å. (2012). Tax policy and entrepreneurship: Empirical evidence from Sweden. Small Business Economics, 38, 495–513.CrossRefGoogle Scholar
  55. Henrekson, M., Johansson, D., & Stenkula, M. (2010). Taxation, labor market policy and high-impact entrepreneurship. Journal of Industry, Competition and Trade, 10(3–4), 275–296.CrossRefGoogle Scholar
  56. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2006). Governance matters V: Governance indicators for 19962005. World Bank policy research working paper.Google Scholar
  57. Keuschnigg, C., & Nielsen, S. B. (2002). Tax policy, venture capital, and entrepreneurship. Journal of Public Economics, 87(1), 175–203.CrossRefGoogle Scholar
  58. Klapper, L., Laeven, L., & Rajan, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82(3), 591–629.CrossRefGoogle Scholar
  59. Klapper, L., & Love, I. (2010). The impact of business environment reforms on new firm registration. World Bank policy research working paper 5493.Google Scholar
  60. Kobrin, S. J. (1978). When does political instability result in increased investment risk. Columbia Journal of World Business, 13(3), 113–122.Google Scholar
  61. Korosteleva, J., & Mickiewicz, T. (2011). Startup finance in the age of globalisation. Emerging Markets Finance and Trade, 47(3), 23–49.CrossRefGoogle Scholar
  62. Mahagaonkar, P. (2008). Corruption and innovation: A grease or sand relationship? No. 017. Jena economic research papers.Google Scholar
  63. McMullen, J. S., Bagby, D., & Palich, L. E. (2008). Economic freedom and the motivation to engage in entrepreneurial action. Entrepreneurship Theory and Practice, 32(5), 875–895.CrossRefGoogle Scholar
  64. Méon, P.-G., & Sekkat, K. (2005). Does corruption grease or sand the wheels of growth? Public Choice, 122(1), 69–97.CrossRefGoogle Scholar
  65. OECD. (2000). The employment outlook. Paris: OECD.Google Scholar
  66. Parker, S. (1996). A time series model of self-employment under uncertainty. Economica, 63(251), 459–475.CrossRefGoogle Scholar
  67. Parker, S. C. (2003). Does tax evasion affect occupational choice? Oxford Bulletin of Economics and Statistics, 65, 379–394.CrossRefGoogle Scholar
  68. Parker, S. C. (2009). The economics of entrepreneurship. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  69. Pathak, S., Xavier-Oliveira, E., & Laplume, A. O. (2015). Entrepreneurship in transition economies: The role of corruption and individual attributes. Journal of Balkan and Near Eastern Studies, 17(4), 427–446.CrossRefGoogle Scholar
  70. Robson, M. T., & Wren, C. (1999). Marginal and average tax rates and the incentives for selfemployment. Southern Economic Journal, 65(4), 757–773.CrossRefGoogle Scholar
  71. Rodríguez-Pose, A., & Storper, M. (2006). Better rules or stronger communities? On the social foundations of institutional change and economic effects. Economic Geography, 82(1), 1–25.CrossRefGoogle Scholar
  72. Romer, P. (1994). New goods, old theory, and the welfare cost of trade restrictions. Journal of Development Economics, 43(1), 5–38.CrossRefGoogle Scholar
  73. Schuetze, H. J. (2000). Taxes, economic conditions and recent trends in male self-employment: A Canada–US comparison. Labour Economics, 7(5), 507–544.CrossRefGoogle Scholar
  74. Shleifer, A., & Vishny, R. W. (1993). Corruption. Quarterly Journal of Economics, 108(3), 599–617.CrossRefGoogle Scholar
  75. Shleifer, A., & Vishny, R. W. (1994). Politicians and firms. Quarterly Journal of Economics, 109, 995–1026.CrossRefGoogle Scholar
  76. Shleifer, A., & Vishny, R. W. (2002). The grabbing hand: Government pathologies and their cures. Cambridge: Harvard University Press.Google Scholar
  77. Sobel, R. S. (2008). Testing Baumol: Institutional quality and the productivity of entrepreneurship. Journal of Business Venturing, 23(6), 641–655.CrossRefGoogle Scholar
  78. Stabile, M. (2004). Payroll taxes and the decision to be selfemployed. International Tax and Public Finance, 11, 31–53.CrossRefGoogle Scholar
  79. Stenholm, P., Acs, Z. J., & Wuebker, R. (2013). Exploring country-level institutional arrangements on the rate and type of entrepreneurial activity. Journal of Business Venturing, 28(1), 176–193.CrossRefGoogle Scholar
  80. Tanzi, V., & Davoodi, H. R. (2000). Corruption, growth, and public finances, IMF Working Paper No. 00/182.Google Scholar
  81. Thai, M. T. T., & Turkina, E. (2014). Macro-level determinants of formal entrepreneurship versus informal entrepreneurship. Journal of Business Venturing, 29(4), 490–510.CrossRefGoogle Scholar
  82. Tonoyan, V., Strohmeyer, R., Habib, M., & Perlitz, M. (2010). Corruption and entrepreneurship: How formal and informal institutions shape small firm behavior in transition and mature market economies. Entrepreneurship Theory and Practice, 34(5), 803–831.CrossRefGoogle Scholar
  83. Torrini, R. (2005). Cross-country differences in self-employment rates: The role of institutions. Labour Economics, 12(5), 661–683.CrossRefGoogle Scholar
  84. van Stel, A., Storey, D., & Thurik, A. (2007). The effect of business regulations of nascent and young business entrepreneurship. Small Business Economics, 28(2–3), 171–186.CrossRefGoogle Scholar
  85. Webb, J. W., Tihanyi, L., Ireland, R. D., & Sirmon, D. G. (2009). You say illegal, I say legitimate: Entrepreneurship in the informal economy. Academy of Management Review, 34(3), 492–510.CrossRefGoogle Scholar
  86. Weston, V. F., & Sorge, B. W. (1972). International Managerial Finance. Homewood, IL: Richard D. Irwin Inc.Google Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Maksim Belitski
    • 1
  • Farzana Chowdhury
    • 2
    Email author
  • Sameeksha Desai
    • 2
  1. 1.Henley Business SchoolWhiteknights, University of ReadingReadingUK
  2. 2.Institute for Development Strategies, School of Public and Environmental AffairsIndiana UniversityBloomingtonUSA

Personalised recommendations