U.S. State Government policies and entrepreneurship

The purpose of this paper is to test the effects of government policies on entrepreneurial activity within the 50 US states.

Using panel data and a fixed-effects model, the authors examine the determinants of the nominal establishment entry rate, the nominal establishment exit rate, and the net establishment entry rate. To measure government policy, the authors use the Economic Freedom of North America (EFNA) index published by the Fraser Institute. The authors use both the overall index and its components. The authors also use the state and local tax burden published by the Tax Foundation.

The authors find that a smaller government is associated with a net increase in business establishments. A freer labor market is also associated with a net increase in business establishments. However, the relationship between the tax burden and entrepreneurship is more complex. Using a measurement of the tax burden from the Fraser Institute, the authors find that an increase in taxes is associated with a net decrease in businesses, but the measurement from the Tax Foundation suggests that an increase in taxes is associated with a net increase in businesses.

The results can help policy makers recognize the effects of expenditure and regulation on business formation.

However, the results do not send a clear message on the effects of taxes on entrepreneurship.

The contribution to the literature is the examination of the effect of the components economic freedom on net business entry in the USA, along with comparing the effects of two measurements of tax burden on net business entry.