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Summer 2015

ISSN 0890-913X

Volume 30, Number 2

Categories: Summer 2015 | Taxation

The Effect of Tax Code Complexity on Entrepreneurship

Rick Weber, Farmingdale State College

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TheJournalofPrivateEnterprise30(2),2015,83–102TheEffectofTaxCodeComplexityonEntrepreneurshipRickWeber∗FarmingdaleStateCollege______________________________________________________AbstractTheUnitedStatesfederaltaxcodeisnotoriouslycomplex,andalthoughtherearemanyestimatesofthecostsofthatcomplexity,thereislittlediscussionoftheeffectsofcomplexityonentrepreneurialactivity.IusethewordcountoftaxcodesasaproxyforcomplexitytolearnhowcomplexityimpactsentrepreneurshipacrosstheU.S.states.Ifindthatastandarddeviationincreaseintaxcodelengthisassociatedwithuptoa5percentdeclinefromthemeaninbusinessentryandexitrates.Iconcludethattaxcodecomplexityhasanegativeimpactonthedynamismofeconomies.______________________________________________________JELCodes:K34,H32,L26,M13,O43Keywords:taxcodecomplexity,entrepreneurship,businessexit,businessentryI.IntroductionThefederaltaxcodeintheUnitedStatesisincrediblycomplex.However,littleattentionhasbeenpaidtocomplexityinstates’taxcodes.GuptaandMills(2003)estimatethatthe1,000largestpublicfirmsfacestatetaxcompliancecostsofaround$300millionandfederaltaxcompliancecostsofaround$1billion.Thesecompliancecostsrepresentapproximately2.9percentand1.4percentoftheirstateandfederaltaxexpenses,respectively(GuptaandMills2003).Thecostoftaxcodecomplexitylikelygenerateseconomiesofscaleduetoexpertiseorexperienceinnavigatingrequiredpaperwork,sothattherelativeimportanceofthesecostsislikelyhigherfornewventures.Dealingwithacomplextaxsystemmaybeoutsourcedtoanaccountingfirm,butitstilladdsafixedcostthatincreasestheminimumefficientscaleofabusiness.∗IthankparticipantsattheFreeMarketInstituteresearchworkshop,theSuffolkUniversityeconomicsdepartmentworkshop,theAssociationofPrivateEnterpriseEducationconference,andthePublicChoiceSocietyconferenceforhelpfulcomments.Additionally,IwouldliketothankBenjaminPowellforhelpfulcommentsonearlydraftsofthispaper.83

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Title	The Effect of Tax Code Complexity on Entrepreneurship
Authors/Creators:	Rick Weber, Farmingdale State College
Year:	2015
Volume:	30
Number:	2
Pages:	83 - 102
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	tax code complexity, entrepreneurship, business exit, business entry

Citation:
Weber, Rick / 2015. "The Effect of Tax Code Complexity on Entrepreneurship." The Journal of Private Enterprise, 30(2): 83-102.