Corporate Taxation and the Size of New Firms: Evidence from Europe

Using a novel country-industry level panel database with information on newly incorporated firms in 17 European countries between 1997 and 2004, we study how taxation of corporate income affects entry rates and the size of entrants at the country-industry level. After accounting for the possible endogeneity of taxation. we find that a reduction in the effective corporate income tax rate leads to a significant increase in entry rates and to a reduction of the scale of entrants. These effects are non-linear and suggest that corporate income tax reductions affect entry rates only below a certain threshold level.