The Entrepreneurial Mind: Taxes Linked to Small Business Failure

By Jeff Cornwall

We already know that higher tax rates decrease the rate of entrepreneurial start-ups in an economy. My friend and colleague John Wark passed along a post from TaxProf Blog that cites a recent study by Rafael Efrat, of California State University-Northridge suggesting that taxes are also a culprit in small business failures, as well. TaxProf Blog offers this quote from the conclusion of the study:

Consistent with the growing tax burden on small-business owners, as well as the growing body of evidence linking higher tax burden with limited entrepreneurial growth and higher closure rates, this study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, white, native-born, well-educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample. (link)