infonet-economy

This paper empirically explores the impact of corporate and personal taxes on the size distribution of business firms. Based on a stylized model of new firm creation and diversity of an economy, we hypothesize that much of the tax burden of corporate and dividend taxation falls on the creation of new firms and depresses entrepreneurship. Mature firms on the the other hand are unaffected by the dividend tax and increase in size by the reduced diversity of the economy. Using data on the size distribution of firms, we find strong empirical support for the impact of taxes on average firm size. Taxes significantly depress the number of small sized firms while bigger firms seem almost unaffected.