Member Article

Corruption and High Taxes hinder would-be entrepreneurs

Governments of countries with high levels of corruption and steep taxes should be doing much more to support entrepreneurship, according to new research from Durham University Business School.

The study, conducted by Dr. Farzana Chowdhury, Assistant Professor of Entrepreneurship at Durham University Business School, sought to understand the impact that a government’s size, levels of corruption, and tax policies had on entrepreneurship, and found that high taxes and corruption in particular were contributing to stifling entrepreneurial activity and success.

Dr Farzana Chowdhury reviewed data on entrepreneurship across 52 different countries over a 10-year period – 2005-2015. The data looked at both opportunistic entrepreneurs - those who start a business because they spot an opportunity in the market which they want to pursue, and necessity entrepreneurs - those who start a business as they do not have another means of generating income.

To measure the levels of entrepreneurship in each country, the Dr. Chowdhury gathered data from the World Bank Entrepreneurship Snapshots (WBGES), which provides an internationally comparable indicator of new business registrations for every country in the world, and the Global Entrepreneurship Monitor (GEM, a cross-national comparative data effort that measures the level of entrepreneurial activity.

To measure government size, the levels of corruption and tax policies, the researchers used numerous indicators, including the World Development Indicators (WDI), the Worldwide Governance Indicators (WGI) and the Internationally Monetary Fund.

By compiling these data sets, Dr. Chowdhury was able to compare the levels of entrepreneurship in a country to the levels of corruption, the costs of tax policies, the government size and levels of government expenditure – including on areas such as housing, education and public services.

In doing, so a correlation between steep taxes, a perceived high level of corruption and a lack of entrepreneurial development was identified.

“Corruption in the public sector is a de facto reality in many countries. On one hand, corruption could have a “greasing” effect for entrepreneurs by providing a way to circumvent cumbersome regulations by paying bribes on the other hand, it could have a “sanding” effect for those who cannot pay because new ventures may have limited resources,” Dr. Chowdhury says.

“An overly simplified interpretation could be that paying taxes discourages entrepreneurs who seek to maximize profits, however the relationship appears to be far more nuanced and complex because tax policy affects entrepreneurs beyond simply their profit margins. Tax policy can affect entrepreneurs through three channels: Income shifting, risk subsidy, and risk-sharing”.

The research also revealed that though the government’s size had little impact on both opportunistic and necessary entrepreneurship in a country, government expenditure on initiatives like social security, housing and economic affairs can all have an impact on entrepreneurship levels.

Dr Chowdhury says,

“Entrepreneurship is vital for economic development, so policymakers and scholars are interested in determining the components that positively influence these activities, and in understanding entrepreneurial motivations to enter the market. Our research shows that a number of factors; tax policies, government size and corruption can all negatively influence entrepreneurial activity within a country. To overcome this, governments need to spend wisely in order to encourage entrepreneurs to take the plunge.”

Dr Chowdhury suggests that these findings can help governments to understand what impacts their policies will have on wider entrepreneurship levels in their country, and the extent to which opportunity and necessity entrepreneurship are likely to change when they make changes to tax policy, resources for public spending, and take anti-corruption measures.

This was posted in Bdaily's Members' News section by Peter Remon .