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Corruption and high tax hinder entrepreneurs

30 June 2021
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Farzana Chowdhury

New research at the Business School has found that countries with high levels of corruption and steep taxes contributed to stifling entrepreneurial activity and success.

Dr Farzana Chowdhury, Assistant Professor of Entrepreneurship, reviewed data on entrepreneurship across 52 different countries over 10 years (2005-2015). The data looked at both:

  • opportunistic entrepreneurs - those who start a business because they spot an opportunity in the market, and
  • necessity entrepreneurs - those who start a business as they do not have another means of generating income.

How entrepreneurship levels were measured

  • data from the World Bank Entrepreneurship Snapshots - an internationally comparable indicator of new business registrations for every country in the world
  • Global Entrepreneurship Monitor - a cross-national comparative data effort that measures the level of entrepreneurial activity.

How levels of corruption, tax policies and government size were measured

Numerous indicators were used including:

  • the World Development Indicators
  • the Worldwide Governance Indicators
  • the Internationally Monetary Fund.

Correlations

Dr Chowdhury was able to compare entrepreneurship levels in a country to corruption levels, the costs of tax policies, the size of the government and levels of government spending, including on areas such as housing, education and public services.

Explaining that corruption in the public sector is a de facto reality in many countries, Dr Chowdhury then commented that corruption could have a ‘greasing’ effect for entrepreneurs by providing a way to circumvent cumbersome regulations by paying bribes. On the other hand, she emphasised that it could have a ‘sanding’ effect for those who cannot pay because new ventures may have limited resources, saying:

“An overly simplified interpretation could be that paying taxes discourages entrepreneurs who seek to maximise profits, however the relationship appears to be far more nuanced and complex because tax policy affects entrepreneurs beyond simply their profit margins. Tax policy can affect entrepreneurs through three channels: Income shifting, risk subsidy, and risk-sharing.”

The research also revealed that though the government’s size had little impact on both opportunistic and necessary entrepreneurship in a country, government spending on initiatives like social security, housing and economic affairs can all have an impact on entrepreneurship levels.

Changes need to be made

Dr Chowdhury said:

“Entrepreneurship is vital for economic development, so policymakers and scholars are interested in determining the components that positively influence these activities, and in understanding entrepreneurial motivations to enter the market.

Our research shows that a number of factors; tax policies, government size and corruption can all negatively influence entrepreneurial activity within a country. To overcome this, governments need to spend wisely in order to encourage entrepreneurs to take the plunge.”

Dr Chowdhury suggests that these findings can help governments to understand what impacts their policies will have on wider entrepreneurship levels in their country, and the extent to which opportunity and necessity entrepreneurship are likely to change when they make changes to tax policy, resources for public spending, and take anti-corruption measures.

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