DP13073 Reviving American Entrepreneurship? Tax Reform and Business Dynamism
|Author(s):||Petr Sedlacek, Vincent Sterk|
|Publication Date:||July 2018|
|JEL(s):||D21, E22, E24, H25|
|Programme Areas:||Macroeconomics and Growth|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13073|
The 2017 Tax Cuts and Jobs Act slashed tax rates on business income and introduced immediate expensing of investments. Using a quantitative heterogeneous firms model, we investigate the long-run effects of such tax reforms on firm dynamics. We find that they can substantially increase business dynamism, potentially off-setting the large decline in the U.S. startup rate observed over recent decades. This result is driven by indirect equilibrium forces: the tax reform stimulates firm entry, leading to an increase in labor demand and wages, which in turn makes firm selection more stringent. Related to this is a large boost of the number of firms and of aggregate output, investment and employment.