Taxes and Entrepreneurship in Former Communist Countries

Abstract

Abstract This paper analyzes the influence of the fiscal framework on entrepreneurship, seeking to quantify the magnitude of this influence. It starts by reviewing the main findings of the literature, showing that, while there is consensus that both tax levels and the bureaucracy that surrounds tax payments have a negative effect on entrepreneurship, there is no unanimity regarding which of the two have a stronger effect. It then continues with an empirical approach, which resides in estimating an OLS regression of two measures of entrepreneurship activity (the number of enterprises that are newly created during one year, and the total number of enterprises that exist in one year in a country) on three fiscal explanatory variables (profit tax levels, labor tax levels, and the time spent to pay taxes), using a panel sample of 27 post-communist countries across a period of 15 years. Empirical results suggest that both tax levels and the bureaucracy that surrounds tax compliance have a negative effect on entrepreneurial activity. The level of the profit tax exerts the strongest negative influence on both the number of newly created enterprises, and the total number of enterprises that exist in a country, while the level of the labor tax exerts a negative, albeit weaker influence, which is significant only for the total number of enterprises. The time spent to pay taxes (expressed as the number of hours per year) returns the lowest coefficient, yet it has a statistically significant negative effect on both the number of newly created and the total number of enterprises.