In the past decade, evidence accumulated that most of productivity gains in the economy are actually realized by entrants. Competition policy often aims at making room for them by preventing incumbents from unduly deterring them but are we sure that some other determinants are not as important? In a recent TILEC discussion paper, TILEC member Marco Da Rin (and co-authors Marina Di Giacomo and Alessandro Sembenelli) study the effect of corporate income taxation on entry patterns. The authors use a novel country-industry panel database with information on newly incorporated firms in 17 European countries between 1997 and 2004. After accounting for the fact that tax rates and tax rules could actually be determined by public authorities in reaction to the observed entry pattern, they 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, two possible measures of the ease of entry. Interestingly, these effects are non-linear, suggesting that corporate income tax reductions can facilitate entry only below a certain threshold level.
