The consequences of fiscal load increase for entrepreneurship: Difference-in-differences approach

Abstract

This study investigates the effect of a twofold rise in fixed payments on sole-proprietors and entrepreneurial activity in 2013 and a twofold decline in these payments in 2014. The paper considers consequences of this decision for various facets of entrepreneurship: the presence of small and medium enterprises in an economy, the new business entries, and employment in small and medium enterprises. To find a solution to this problem, we use a difference-indifferences method of policy evaluation. Results of this analysis show that because of a sharp rise in fixed payments, the number of sole-proprietors increased and there was a dramatic fall in the number of new businesses. In addition, employment in small and medium firms also decreased by this decision to raise payments. The decrease in fixed payment in 2014 could not compensate for the negative effects of the previous year among small businesses. Despite various measures to support entrepreneurship, new business entries continued to decline, although the speed of this decline decreased after 2013. Thus, the decrease in fixed payments became an incentive to compensate only some decrease over 2013. The results show that entrepreneurs have a very rapid response to fiscal load increase and have a slow response to decreases in taxation.