This paper examines how tax policy should be designed to best encourage entrepreneurial activity in start-up firms. We begin by describing several presumed market failures affecting entrepreneurial firms that would lead to an under-provision of entrepreneurial activity: 1) information spillovers from innovations in entrepreneurial firms to other firms, 2) positive externalities to consumers from innovative new products sold by these firms, and 3) lemons problems in the market for both debt and equity issued by these firms. We then analyze the degree to which various tax policy measures can alleviate these failures. A key complication we focus on is the inability of the government to observe which, and the degree to which, any given start-up firm is entrepreneurial. This forces policy to target behavioral differences between entrepreneurial and non-entrepreneurial start-ups. We presume that start-up firms, to the degree they are entrepreneurial, face upfront costs in developing and marketing a new technology, and in the process face substantial risk. Our analysis then suggests the use of refundable tax savings from business losses in start-ups together with a compensating surtax on the profits of start-ups (needed in the case of lemons problems) to help alleviate the various market failures faced by entrepreneurial start-ups.

This paper explores tax policy effects and revenue implications of joining the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT). It documents that countries joining GATT/WTO after 1990 have implemented tariff-cum-tax reforms, lowering tariff rates and raising consumption tax rates, in particular through reform or introduction of a value added tax (VAT). Employing a panel of 97 developing and transitional countries, 31 of which joined GATT/WTO between 1990 and 2011, using robust difference-in-difference specifications as well as the synthetic control method, we find a statistically and economically significant decline in revenues from import duties. This finding supports concerns about revenue losses, but also corroborates the efficacy of the late Uruguay GATT and the WTO trade regimes in promoting free trade among new members. Regarding consumption taxes, we find robust evidence that revenue substitution was successful, since revenue losses from import duties were more than compensated for by enhanced revenues from consumption taxes. With regard to the timing of the revenue effects, our results show that revenue losses in import duties mostly take place at the time of membership or later. Changes in consumption taxation, however, exhibit pre-membership effects, as revenues are increased, and VAT is adopted, often a few years ahead of losses in import duties. No such effects are found before the start of the accession negotiations, indicating that consumption tax reforms are initiated once a country is on the road to GATT/WTO membership.

We examine whether firms respond to settlements of their uncertain tax benefits (UTBs) by adjusting the related UTB reserve. A reported UTB settlement indicates that the tax authority challenged at least one of the firm’s uncertain tax positions, thereby providing information to managers regarding the sustainability of similar tax strategies and outstanding UTBs. Consistent with expectations, our results suggest that UTB settlements are negatively related to the accrual for new uncertain tax positions. Further, we demonstrate that managers make less downward adjustments to the UTB reserve related to existing uncertain tax positions following settlements with tax authorities. Finally, additional analysis suggests that the valuation of UTBs is lower in the year subsequent to a UTB settlement. Collectively, our results suggest that the information gathered from tax audit outcomes influences firms to be more conservative in their tax reporting, and possibly their future tax planning as well.