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The primary goal of tax policy is to raise public revenues, but policy makers also recognize that the structure of taxation shapes incentives and should be crafted to enhance economic growth. Tax policy should foster new business creation and create a supportive climate for innovative firms. The theory of externalities implies taxes should be highest where activity has negative social costs (e.g. pollution) and lowest where the activity has positive social benefits (e.g. innovation). In practice, the tax code is a thicket of anti-entrepreneurial incentives and a source of red tape compliance burden. Taxes influence ownership structure, job creation, financing structure, and often the very decision to start a business. Simply put, incentives matter.
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