Working Paper No. 896

Entrepreneurial Innovations and Taxation

Published: January 2, 2012, revised August, 2012Pages: 43Keywords: Entrepreneurship; Innovation; Corporate taxes; Firm growthJEL-codes: H25; L13; M13; O31
Published version

Entrepreneurial Innovations and Taxation Andreas Haufler, Pehr-Johan Norbäck and Lars Persson


Many governments promote small businesses for the dual reasons of fostering ‘breakthrough’ innovations and employment growth. In this paper we study the effects of tax and subsidy policies on entrepreneurs’ choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.

Pehr-Johan Norbäck

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Lars Persson

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Ph: +46 8 665 4504
lars.persson@ifn.se

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