Entrepreneurs have to deal with one-off start-up costs, such as notary charges as well as recurring costs in the form of income and corporate taxes. A number of prior studies have linked start-up costs and taxes to the level of entrepreneurial activity within and across economies (Djankov et al., 2002; Braunerhjelm and Eklund, 2014). Start-up costs and taxes may not only influence entrepreneurial entry but also the likelihood of innovative entrepreneurship (Schumpeter, 1934; Baumol, 1990).
Low start-up costs encourage the entry of lower quality entrepreneurs, and hence the pool of entrepreneurs is of higher quality when start-up costs are higher (Kaplan et al., 2011). Taxes, which represent recurring costs that reduce the gains from innovation, have a deterrent effect and discourage, in particular, risk-taking entrepreneurs with innovative ideas. Innovative entrepreneurs are motivated by the expectation of high returns on their innovative activities in the form of “entrepreneurial profit” (Baumol et al., 2007).
Darnihamedani, Pourya; Hendrich Block, Joern; Hessels, Jolanda; and Simonyan, Aram
"START-UP COSTS, TAXES AND INNOVATIVE ENTREPRENEURSHIP (SUMMARY),"
Frontiers of Entrepreneurship Research: Vol. 35
, Article 5.
Available at: http://digitalknowledge.babson.edu/fer/vol35/iss11/5