Small businesses have created two out of every three new jobs since the end of the Great Recession.[1] So it makes sense that states have spent the last few years encouraging entrepreneurship to spur economic growth. As part of its 2013 tax bundle, North Carolina cut personal and corporate income tax rates with the assumption that lower tax rates will make starting a business more attractive. But does the evidence support that assumption?

In a 2012 study for Small Business Economics, economists Donald Bruce and John Deskins analyzed the level of entrepreneurship in all 50 states, as well as each state’s share of national entrepreneurship.[2] They defined “entrepreneurship” as the number of sole proprietors and individuals who reported their income from small businesses. They then compared each state’s corporate, personal income, and sales tax rates; economic development incentives; and rules governing multi-firm and multi-state operations. If high tax rates do stifle small businesses owners, then we would expect to see lower rates of entrepreneurship in states with higher taxes.

But that isn’t what Bruce and Deskins found. In fact, they found that state tax rates have no effect on a state’s small business activity. While the authors did find that high marginal income taxes had a slight effect on a state’s contribution to national entrepreneurship, the effect was not statistically significant. Neither was a small positive effect of a progressive income tax structure. 

“Tax policy changes will probably not have the effects on small business activity that policymakers might believe.” – Bruce and Deskins 

Bruce and Deskins ultimately recommend more traditional tax reform, like simplifying the tax system, in order to "create a more neutral and productive tax environment." [3] 

These findings will surely disappoint anyone hoping tax cuts are the tonic that will rouse North Carolina’s entrepreneurial spirit.


[1] Small Business Administration. http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
[2] Bruce, Donald and Deskins, John. (2012). Can state tax policies be used to promote entrepreneurial activity? Small Business Economics. Retrieved 25 July 2014, from http://web.utk.edu/~dbruce/sbe12.pdf
[3] See note [2].