Tax uncertainty and business activity

• Main Authors: LEE, Jungho, XU, Jianhuan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Entrepreneurship; State government; Uncertainty; Behavioral Economics; Industrial Organization; Taxation
• Online Access: https://ink.library.smu.edu.sg/soe_research/2275; https://ink.library.smu.edu.sg/context/soe_research/article/3274/viewcontent/uncertaintax.pdf
• Institution: Singapore Management University

We investigate the extent to which uncertainties about tax policies affect business activities. We develop a statewide tax-uncertainty measure (TU measure) and show that it captures state corporate tax uncertainty. By comparing adjacent counties across state borders, we show that increasing tax uncertainty by one standard deviation (a 30% increase in the TU measure) leads to a 0.17% point per-year decrease in the growth rate of establishments over two years. The result holds after conducting a variety of robustness checks and is not likely to be driven by general state-policy uncertainties.