Taxes and a Country's Location Attractiveness for Start-ups
A Model-Based Analysis of National Tax Law Differences
Start-ups are characterized by an over-time declining high initial economic risk and the generation of initial losses. Since taxes affect a start-up’s economic development and the offset of accumulated losses against profits results in tax savings, national differences in tax loss offset regulations and total statutory tax rates influence a country’s attractiveness as a location for start-ups. Because of this, we analyze what systematic effects national differences in tax loss offset regulations and total statutory tax rates have on a country’s attractiveness as a start-up location. To represent a start up’s uncertain economic development we use this general binomial model complemented by a novel exponential trend risk development function to integrate a start-up’s economic characteristics. Because of their geographic, linguistic, cultural, and economic proximity and the representation of common international tax law differences, we focus the analysis on German and Austrian tax laws. We found that national differences in the loss-offset direction, in the limitation of the loss-offset height, and in total statutory tax rates constitute substantial aspects of a country’s attractiveness as a start-up location. Our findings further indicate that location comparisons that solely focus on total statutory tax rates and neglect tax loss-offset regulations are insufficient for the evaluation by start-ups of a country’s location attractiveness due to their economic characteristics. Tax loss-offset regulations distort location decisions that are solely based on a comparison of total statutory tax rates. Finally, we found that a start-up’s risk characteristics and the height of its initial investment play a crucial role in determining the degree of distortion.
