DP13073 Reviving American Entrepreneurship? Tax Reform and Business Dynamism

Author(s): Petr Sedlacek, Vincent Sterk
Publication Date: July 2018
Keyword(s):
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.