Taxes, tax administrative burdens and new firm formation Pontus Braunerhjelm and Johan E. Eklund* I. INTRODUCTION Regulations have been shown to deter growth, particularly through their effects on new firm formation, competition and innovation (Nicoletti and Scarpetta 2003, Ciccone and Papaionnou 2007, Dawson 2007, Aghion et al. 2009, Ardagna and Lusardi 2009), and start-up costs are considerably higher in more regulated economies (Fonseca et al. 2001). 1 However, even firms that are simply copying incumbents tend to generate higher productivity, innovation and falling prices (Andersson et al. 2012). Similarly, recent studies indicate that regulatory reform results in higher rates of market entry by new firms (Klapper and Love, 2011). Regulation not only influences the direct costs of entering a market but also leads to substantial indirect effects that tend to deter entry. As shown by Ciccone and Papaionnou (2007), Klapper et al. (2006) and Ardagna and Lusardi (2009), the positive effects that are associated with skills (education) diminish consid- erably in more regulated countries, particularly for opportunity-based entrepre- neurship. Similarly, the positive effects of knowing people who are entrepreneurs – thus, having an entrepreneurial network and belonging to an entrepreneurial culture – also tend to be reduced. This effect appears to prevail primarily with respect to opportunity- and innovation-based entrepreneurship. Hence, the direct * Pontus Braunerhjelm: Swedish Entrepreneurship Forum and Royal Institute of Technology, Address: Södra Kungstornet, Kungsgatan 33, 7th floor, SE-111 56 Stockholm, Sweden. Tel.: +46-72-9565569. Email: pontus.braunerhjelm@entreprenorskapsforum.se Johan Eklund: Swedish Entrepreneurship Forum and Jönköping International Business School, Address: Södra Kungstornet, Kungsgatan 33, 7th floor, SE-111 56 Stockholm, Sweden. Tel.: +46-70-6591406. Email: johan.eklund @entreprenorskapsforum.se. Please address all correspondence to Johan Eklund. Acknowledgments: We gratefully acknowledge financial support received from Marianne and MarcusWallenberg’s Foun- dation. We are also grateful for comments on this paper from seminar participants at the Swedish Ministry of Finance and from Professor Claes Norberg. 1. The reasons for regulations have been attributed to “public interest theory,” which originated in Pigou’s (1938) work. The basic idea is that unregulated markets will result in market failures that require the imposition of regulations. More recent research has questioned those insights (Coase, 1960). In par- ticular, “public choice theory” has emphasized the negative effects of vested interests, rent seeking and regulatory capture (Tullock 1969, Stigler 1971, Peltzman, 1976). KYKLOS, Vol. 67 – February 2014 – No. 1, 1–11 © 2014 John Wiley & Sons Ltd. 1