Growth aspiring entrepreneurs’ response to corporate tax rates: Is it universally negative?

Abstract

The article challenges the universal assumption in the literature that corporate tax rates constrain growth-aspiring entrepreneurs. The strength of financial intuitions may be a stronger predictor of growth aspirations than corporate tax rates. With the support of strong financial institutions, countries possessing norms supportive of individual success and risk-taking will lead growth-aspiring entrepreneurs to persist in the face of corporate tax rate increases. For countries with weak financial institutions, it does not matter whether norms are supportive or not of individual success and risk-taking behaviour; entrepreneurs do not have the means to grow their enterprises and thus do not show a strong response to corporate tax rate increases. This argument is supported by an analysis of 394 country-year observations for 77 countries from the GEM and World Bank databases. The study contributes to understanding the contextual conditions required for growth-aspiring entrepreneurs to overcome tax constraints and, more broadly, formal institutional constraints. Our qualifying condition in performance-oriented norms points to the importance of informal institutions in promoting entrepreneurial resilience and persistence. This also points to the importance of the interdependency between formal and informal institutions when explaining economic behaviour.