Do Tax Cuts Promote Entrepreneurial Longevity?

Abstract

We use a 12-year panel of tax return data to assess whether or not taxes affect the duration of entrepreneurial activities. Our study is the first to examine the effects of tax rates on exit decisions using duration-analysis techniques. We find convincing evidence that cutting marginal tax rates faced by wage-and-salary workers can reduce the duration of entrepreneurial activities, while cutting marginal tax rates faced by entrepreneurs can lengthen entrepreneurial spells. The relative magnitudes of these effects suggest that an across-the-board tax cut would increase entrepreneurial longevity.