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What Do Small Businesses Do? Erik Hurst University of Chicago

The foreign tax credit is intended to relieve you of the double tax burden when your foreign source income is taxed by both the United States and the foreign country. Generally, if the foreign income tax rate is higher than the U.S. rate, there will be no U.S. tax on the foreign income. If the foreign income tax rate is lower than the U.S. rate, U.S. tax on the foreign income will be limited to the difference between the rates. The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on. | What Do Small Businesses Do 1 Erik Hurst University of Chicago erik.hurst@chicagobooth.edu Benjamin Wild Pugsley University of Chicago bpugsley@uchicago.edu August 2011 Abstract In this paper we show that substantial differences exists among U.S. small businesses owners with respect to their ex-ante expectations of future performance their ex-ante desire for future growth and their initial motives for starting a business. Specifically using new data that samples early stage entrepreneurs just prior to business start up we show that few small businesses intend to bring a new idea to market. Instead most intend to provide an existing service to an existing customer base. Further using the same data we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses which are concentrated among skilled craftsmen lawyers real estate agents doctors small shopkeepers and restaurateurs. Lastly we show non pecuniary benefits being one s own boss having flexibility of hours etc. play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent entrepreneurial luck and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings. 1 We would like to thank Mark Aguiar Fernando Alvarez Jaroslav Borovicka Augustin Landier Josh Lerner E.J. Reedy Jim Poterba David Romer Sarada Andrei Shleifer Mihkel Tombak Justin Wolfers and seminar participants at Boston College the 2011 Duke Kauffman Entrepreneurship Conference the Federal Reserve Bank of Minneapolis Harvard Business School the Institute for Fiscal Studies the 2011 International Industrial Organization Conference London School of Economics MIT 2010 NBER Summer Institute Entrepreneurship Workshop Penn State .