The OECD has warned that corporate income tax policies risk entrenching larger firms at the expense of smaller and younger businesses, undermining market dynamism. A new brief released on 27 May 2026 shows how tax rates, compliance costs, and incentive design can either support or hinder firm entry and growth, with poorly calibrated policies creating competitive advantages for incumbents over new entrants.

RF Report

The OECD has issued a tax policy brief on Corporate Income Taxation and Business Dynamism on 27 May 2026.

In recent decades, concerns have grown over the decline in business dynamism, the process by which firms enter, expand, contract, and exit markets. Part of the OECD Tax Policy Briefs series, this brief explores how corporate income tax (CIT) policies can support business dynamism, examining the effects of tax rates, compliance costs, loss-offset provisions, and tax incentives, as well as the interaction between CIT and dynamism when considering both financing frictions and market competition. It provides an overview of how tax policy can support a more dynamic and competitive business environment.

Key messages

  • Concerns about declining business dynamism and the impact on growth are rising.
  • Corporate income tax (CIT) rate can increase firm entry, though the magnitude of the effect remains unclear. Firm exit is less sensitive and may be driven more by market selection. The impact of CIT rate changes is larger for smaller and younger firms.
  • Tax compliance costs and the costs of complexity are particularly high for small and young firms and can limit entry.
  • CIT can exacerbate or alleviate financial frictions for small and young firms. Targeted CIT support for these firms can reduce cash constraints, but tax is not the primary policy tool in this regard.
  • Tax incentives can support investment and innovation but can increase incumbency advantages. R&D tax incentives can support young intangible-intensive firms, and size-based tax incentives can support firm entry and firm growth. However, drawbacks should be carefully considered; poorly designed incentives can generate an unlevel playing field between incumbents and new entrants. For small and young firms refundability and carryover provisions of R&D tax incentives can be important.
  • Loss offset provisions can reduce risk-aversion but can bias against start-up investments. Small and young firms are often loss-making and may not be able to benefit from many forms of tax relief. Incomplete loss carryover can create a bias against riskier projects and result in both inefficient and efficient firms to exit the market prematurely, while overly generous loss offset provisions may induce risky overinvestment or delay the exit of low-productivity loss-making firms.
  • CIT may indirectly favour larger firms. These firms tend to exploit tax incentives and tax planning opportunities more efficiently. This can confer a competitive advantage over smaller and younger businesses, with potential negative effects on business dynamism.
  • Other taxes can also impact firm entry decisions and business growth. While not studied in detail in this note, the impact of taxes beyond CIT may be important for supporting dynamism and entrepreneurship, including through supporting the deepening of capital markets through household savings.