The Scope of Taxation in Influencing Entrepreneurship: Historical Overview of Tax Policies

Summary of Study
Bottom Line: Entrepreneurs commonly cite tax regulations and tax rates as the key problems facing the establishment of commercial entities. In the recent past, different American governments have opted for a progressive tax regime, especially one that favors the middle class at the expense of the rich. While such an approach boosts innovation, entrepreneurship, and promotes job creation, it negatively affects the rich who eventually opt to incorporate their companies abroad and place their savings offshore. Therefore, this yields a counter-productive effect, which necessitates a thorough re-examination of modern-day and future policymaking.

Small and medium-sized enterprises are at the core of America’s competitiveness. SMEs play a large role in creating breakthrough innovations. Tax breaks play a major role in incentivizing SME activity within economies.

Tax breaks provide favorable conditions which encourage business creation and relocation. This, in turn, leads to generation of jobs and production of goods at lower costs of production. In general, tax incentives end up promoting investment, employment creation, and foreign direct investment. Tax cuts influence entrepreneurial behavior through both income and substitution effects. 

Overall, the positive effects of such rate cuts arise in the form of growth in savings and investments. In addition, rate cuts play a key role in helping to eliminate economic distortions alongside facilitating an efficiency-improving shift, particularly in the composition of a country’s economic activity.
High taxes mean entrepreneurs have less money to invest in their businesses, and this eventually leads to a slowdown in job creation. By introducing tax breaks, the main objective remains to provide enterprises, both large and small, with favorable terms to bolster profitability. 

Besides encouraging entrepreneurship and reducing unemployment, tax breaks also play a role in broadening a country’s tax base. This can be achieved because more businesses are likely to emerge under a low-tax regime. Further, innovation levels are likely to rise whenever an enabling environment is provided. In a nutshell, this favors the establishment of new industries, which increases income streams upon which a government can impose taxes. 

However, lower taxes can significantly impact revenue collection and slow down an economy. Besides that, whenever policymakers issue a tax break on a certain economic group, they are often forced to put more pressure on another sector of the economy to stabilize revenue collection in the short-run.

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