Becoming an Entrepreneur - The Role of Profit Taxes

In this paper we study the effects of profit taxation on the creation of new firms using a unique data set covering all firms created in Germany since 2000 irrespective of whether they are German or foreign owned. We exploit the fact that each municipality in Germany is able to independently set the rate of local profit taxation, whereas all tax-base related regulation is identical across municipalities. Our analyzes show that firms react to some incentives induced by profit taxes, but to a small extent and depending on the legal status of the firm.