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Minnesota’s above average Corporate Taxes drive our below average entrepreneurship

Last week, I wrote about how Minnesota had the the 36th fastest growing economy in the United States in the first quarter of 2019. One reason for this below average growth is below average entrepreneurship. As we noted in our report The State of Minnesota’s Economy: 2018, in 2000, new and young businesses (those aged 0 through 5 years) as a share of all businesses were 41% in Minnesota and 43% nationally. By 2014, the most recent year for which we have data, that number had fallen nationally to 34% but in Minnesota to 30%, as Figure 1 shows.

Figure 1: New and Young Businesses as a Share of All Businesses, 2000-2014

Source: Census Bureau

In surveys, entrepreneurs list taxes as one of the top barriers they face. In a recent summary of the research in a paper titled ‘Tax Policy and Entrepreneurship‘, economists Garrett Watson and Nicole Kaeding from the Tax Foundation find that

Corporate income tax rates are associated with lower levels of entrepreneurship. One study of 17 European countries between 1997 and 2014 found that corporate income tax rates had significant effects on firm entry rates, and that “this evidence is consistently robust across a variety of specifications.” Lower corporate income tax rates increase firm entry, the authors argue, by increasing the return to risk and incentivizing incomes to shift from personal to corporate taxation. The authors also find that lower corporate income tax rates spur greater firm entry when there is a better tax compliance infrastructure, suggesting that countries will see more benefit from lower corporate income tax rates if they make it more difficult to hide income through profit and loss account manipulation. Corporate income taxes may also uniquely harm entrants over incumbent firms.

This gives us some clue as to why our state might lag in entrepreneurship. Data, also from the Tax Foundation, shows Minnesota’s top rate of Corporate Income Tax of 9.8% is the third highest in the United States. Only Iowa (12.0%), New Jersey (11.5%), and Pennsylvania (10.0%) have higher rates.

Figure 2: Top Rates of Corporate Income Tax, 2019

Source: The Tax Foundation

John Phelan is an economist at the Center of the American Experiment. 

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