ABSTRACT

The problem this study seek to address is in three fold: complex high tax rates in relations to formation, entry and sustainability of small businesses. The lack of fairness and tax breaks or holidays and its effects on entrepreneurial motivation and re-investment, and the inefficient tax administration with regards to low entrepreneurial productivity and tax evasion in Limbe municipalities. The study has made positive contributions to knowledge in utilizing two theories to form the theoretical baseline for this work.

The theories used are: The Economic Development Theory by Schumpeter and the Public Choice Theory by Buchanan, bringing out the relevance of each theory to the study. Through the various research instruments used such as open-ended and closed-ended questions, interview and observation. It has been identified that complex high tax rates negatively affect formation, entry and sustainability of entrepreneurs. This was achieved with the aid of 150 respondents who answered the questions from three municipalities in Limbe. Result from the field were analyzed quantitatively and qualitatively.

Quantitatively, the researcher employed the Chi-square test method to test the three specific hypotheses. With the general agreement rate of 90% for the first hypothesis, and a calculated X² = (159.93) greater than the table value (26.29) at 0.05, the research hypothesis was accepted which means that: complex tax rates negatively affect formation, entry and sustainability of entrepreneurs in Limbe municipalities. For the second hypothesis, the general agreement rate was 74.08% and the calculated X² = (99.23) greater than the table value of (26.29) at 0.05. here again, (H₁) has been accepted which stipulates that: lack of fairness and limited tax breaks or holidays in the Cameroon tax system affect entrepreneurial motivation and re-investment in Limbe municipalities. And finally, in the third hypothesis, the general agreement rate was 78.73 and the calculated X² = (206.07) which was greater than the table value of (26.29) at 0.05 significance. As a consequence, (H₁) was again accepted in disfavor of (H₀) which means that: inefficient tax administration contributes to low productivity and tax evasion by entrepreneurs in Limbe municipalities.

CHAPTER ONE

GENERAL INTRODUCTION

 1.1 Background to the study

The intersection of tax policy and entrepreneurial development is a crucial area of research, particularly in developing countries like Cameroon. Tax policy significantly influences the business environment, affecting both the establishment and growth of entrepreneurial ventures. This study focuses on Limbe municipalities, an area with unique challenges and opportunities for entrepreneurs.

In the world economy at large and Cameroon in particular, the role of entrepreneurship in economy development is substantial. After all, entrepreneurs do not just build businesses and grow their personal wealth; they also impact the economy by creating new jobs and opportunities, driving innovation, developing new markets, products and services. The question is can this move be sustained after coinciding with the tax policy of Cameroon? Interestingly, it has been shown that institutional and policy reforms (including tax reforms) can influence the growth and development of entrepreneurship in a nonlinear way. Hence policy reforms, such as trade liberalization, have a stronger positive impact on growth when entrepreneurship is stronger while some institutional reforms work best on growth where entrepreneurial activity is high Baliamoune – Lutz (2007&2010:103).

Entrepreneurship has been a primary driving force behind employment creation, innovation, and economic growth. Innovative entrepreneurial activities not only generate income for successful firms and individuals, but can also create positive spillovers to state and local economies. State governments have a long history of using tax policy to promote entrepreneurship as part of a broader economic development mission. Until recently, most of these attempts have focused on cutting business taxes, such as the state corporate tax, in order to boost economic growth and job creation. Over the past several years, however, a growing number of elected officials and business organizations have called for cuts in state personal income taxes to benefit entrepreneurs who earn pass-through income Mazerov (2013:23). Recent tax policy debates in Kansas, Nebraska and Louisiana have touted a shift in tax policy away from income taxes and toward sales taxes, hoping such reforms would bring businesses and jobs to their states and lower the compliance costs associated with income taxes. The critical question that remains unanswered is whether such policy changes would give rise to the desired behavioral responses. Since entrepreneurship has such important economic effects, it is important to understand the influence of public policies such as personal and corporate income taxation on entrepreneurial activity.  Estimated parameters can be used to guide policy design if a non-zero effect can be determined. If the empirical evidence indicates that taxes have small or inconsequential effects on small businesses, then using tax policy to promote entrepreneurial activity would be unproductive.  

The impact of taxes on business activity has received considerable attention in the literature, but virtually all of the prior studies have focused on extensive margin measures such as business locations, the number of small firm births, or variants of self-employment rates. Bartik (1985:13), for example, found that a ten percent increase in a state’s corporate income or property tax rate caused a one to three percent decline in the number of new plants. Wasylenko (1997:45) provided a review of the literature and concluded that taxes had statistically significant but quantitatively small effects on inter-regional location behavior with larger impacts at the intraregional level. Although these studies shed some light on the interaction between state tax policies and business decisions, they may be less relevant to entrepreneurial activity.  First, if smaller businesses are less mobile than larger firms (e.g. because of family ties or business linkages to local markets), they are perhaps less likely to respond to state differences in tax policies.

Further, most states have focused their tax incentive programs on larger manufacturing and headquarters firms rather than small businesses and entrepreneurs Bruce and Deskins (2012:39). Only a few studies have used state-level time series or panel data to investigate the impact of policy on small businesses, but most have found that state-level tax policies have significant effects on a variety of measures of entrepreneurial activity.  Bartik (1989:46) investigated detailed tax information and showed that higher property taxes, corporate taxes, and sales taxes on equipment negatively impacted small business start-ups. On the other hand, Carlton (1979:40) found no strong evidence that local taxes influenced the number of firm births. Georgellis and Wall (2002:13) used panel regression to examine the various determinants of state-level entrepreneurship.  They found that bankruptcy exemptions, corporate tax rates, and the level of national entrepreneurial stock as measured by the share of individuals reporting Schedule income.

This research work aims to provide important insights into the interaction between tax policies and entrepreneurship, and they present two important avenues for extension and potential improvement. First, most of the recent empirical research in this area has relied upon traditional fixed effects panel regression models. When considering entrepreneurial outcomes, it is important to account for the fact that outcomes in the previous periods could inherently affect outcomes in the current period. This inertia in entrepreneurial activity, which we document in this paper, may result from such things as incomplete labor mobility (or other labor-market friction) or clientele loyalty.  In panel data settings, it is important to control for entrepreneurial performance in previous periods because successful small firms today are more likely to be successful in the future.  State-level observations are thus potentially correlated over time.  

The consideration of the previous outcome as an explanatory variable raises the possibility of an endogeneity problem in a traditional panel regression. Fortunately, dynamic panel estimators are available to address this issue. We explore two different dynamic panel estimators proposed by Arellano and Bond (1991:37) and Arellano and Bover (1995:34). These are consistent and efficient estimators because instruments for endogenous explanatory variables are generated from variables already specified within the model. These specifications eliminate any unobservable time-invariant state effects and temporal effects that may systematically affect small businesses.  

Second, most of the prior studies have focused on extensive-margin measures of entrepreneurial activity, such as self-employment rates, counts of federal income tax returns with a Schedule C for small business income, or counts of small firms or establishments. One potential shortcoming of these measures is traditional measurement error.  Specifically, many self-employed individuals or Schedule C filers are not truly entrepreneurial, and many entrepreneurs do not classify themselves as self-employed or file a Schedule C Bruce and Deskins (2012:42). Moreover, the birth of a new firm or establishment does not necessarily signify an increase in entrepreneurial activity. These measures also do not capture potentially more important aspects of entrepreneurial performance, such as firm sustainability and growth. As is well known, small businesses start and fail at significantly high rates. An estimated 650,000 new employer-owned businesses were started and 565,000 went out of business in 2006 Conte et al. (2012:14). Similar small-firm birth and death rates are observed each year.  

The birth of a new small business is important, but state policymakers are probably more concerned with enduring small and innovative firms that create a steady stream of jobs and generate economic spillovers over a longer period.  Indeed, entrepreneurial performance on the intensive margin may be more relevant to state policy than extensive margin counts of entrepreneurs or small businesses, especially given the relatively short life span of new small firms.

In addition, in the context of Cameroon, we find that state tax policies do not have quantitatively important effects on most of the entrepreneurial performance and productivity measures (development). The state tax policies are only statistically significant in static specifications that do not allow for past periods of performance to influence the present period, echoing much of the previous literature. In dynamic specifications that account for this trend in performance, the state tax policies do not have significant impacts. A step-by-step comparison with the prior literature shows that the main difference comes from the difference in estimation methods (i.e., using the Arellano-Bond estimator). Our results suggest that states that are interested in promoting entrepreneurial success should turn their focus away from ineffective tax policy options toward more general efforts to improve the business climate by reducing crime or unemployment rates or increasing expenditures on public services including education.

Micro enterprises are usually small individually-owned or family-managed businesses offering basic goods and services. Microenterprises tend to lack organizational and management structures and are generally characterized by uncertainty, innovation, and evolution. Udechukwu (2003:15), notes that microenterprises are mostly sole proprietorships and partnerships, and only a few are registered as limited liability companies. Micro enterprises generally have a simple management structure, and in many cases, the owner is the manager. With few employees who in most cases lack the appropriate skills and competencies. Given the simple management structure and extensive dependence on the owner, the lifespan of the enterprise is often dependent on the longevity of the owner and his/her interest in continuing the business.

MSMEs (of which microenterprises constitute the largest proportion) are considered the most reliable engine of development for the Less Developed Countries (LDCs). This is because they enjoy a wider geographical presence, ensure more equitable income distribution, employ a high number of poor persons, and facilitate diffusion skills Panitchpakdi (2006:21). For MSMEs to achieve their goals the government has to provide the necessary infrastructure to the sector. One of the ways through which the government generates income is through taxes paid by MSMEs in recognition of the depth and breadth of the consequences of microenterprises in alleviating poverty and lack of job employment, there has been a deep interest in recent years for the development of microenterprises in less developed countries. The microenterprise is seen as a key to Cameroon’s growth and alleviation of poverty and unemployment in the country.

Therefore, the promotion of such enterprises in emerging economies like Cameroon is of paramount importance since it brings about an excellent distribution of income and wealth, economic self-dependence, entrepreneurial development, employment, and a host of other positive, uplifting economic factors Aremu (2004:95). Moreover, in a country like Cameroon with an adverse Balance of Payment situation, the growing contribution of the micro industries sector in Cameroon’s export portfolio goes a long way in generating foreign exchange and smoothening out the adverse Balance of payment situation. There is a general belief that the desired employment generation in this country can be achieved through the development of micro-enterprises Schmitz (1995:34) and Awosika (1997:45). Gunu (2004:23) and Aremu (2010:35) posited that micro-enterprises provide income, savings, and employment generation. They are seen as real engines for the development of entrepreneurial capabilities and indigenous technology which will generate employment in the country. Micro enterprises constitute the basis for industry and natural economy in many countries. It has been estimated that micro enterprises employ 22% of the adult population in emerging countries Daniel (1994:14) and Fisseha (1991:76). Micro-scale enterprises can be regarded as one of the essential elements of a country’s development and this plays a crucial role in the economy of this nation.

Tax is an obligatory and non-refundable contribution executed by the government for public purposes and payment cannot be avoided without attracting a punishment in return for which no gain/quid pro quo is promised by the government to the taxpayer. Payment is not followed by concurrent benefit in return Balunywa, (1988:24). To protect and control the operation of microenterprises, many countries in Africa have imposed several types of taxes that aim to protect home/infant industries (protectionism) and guarantee fair competition among microenterprises. High tax rates and tax complicity discourage the growth of micro-enterprises Oludele and Emilie (2012:34). This has an economic impact on the growth of the economy in the given country. From an economic point of view, taxes increase the production cost of goods and services which would eventually lead to a higher price of goods/services to the final consumers. Also, the revenue collected from taxes represents the main funding source for governmental expenditures Baurer (2005:21).