DP13073 Reviving American Entrepreneurship? Tax Reform and Business Dynamism
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 oﬀsetting 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.