Tax Policy and Entrepreneurial Entry

Tax Policy and Entrepreneurial Entry from decisions about entrepreneurship, such as entry, saving, and investment. Given recent emphasis on the significance of business ownership in explaining aggregate wealth accumulation and its distribution (see e.g., Gentry and Hubbard, 1999; Vincenzo Quadrini, 1999), such omissions are likely to be significant. In addition, entrepreneurs’ decisions may account for much of the responsiveness of taxable income to changen marginal tax rates. We focus on impacts of tax rates and, in particular, tax progressivity on the decision to become an “entrepreneur.” While recent research has examined effects of marginal tax rates on investment decisions of entrepreneurial households (Robert Carroll et al., 1997), analysis of effects of taxation on entry is less often pursued. While a proportional tax with a full loss offset will not affect the entry decision for a risk-neutral individual, a progressive schedule with imperfect loss offsets can discourage entry. We find substantial evidence for this effect on entrepreneurship using variation in tax schedules faced by householdn the Panel Study on Income Dynamics (PSID) over the period from 1979 to 1992. While progressive taxation could in principle encourage entry via insurance for risk-averse entrepreneurs through the tax system or through offering greater incentive to avoid taxes http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Tax Policy and Entrepreneurial Entry

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Publisher
American Economic Association
Copyright
Copyright © 2000 by the American Economic Association
Subject
Papers
ISSN
0002-8282
DOI
10.1257/aer.90.2.283
Publisher site
See Article on Publisher Site

Abstract

from decisions about entrepreneurship, such as entry, saving, and investment. Given recent emphasis on the significance of business ownership in explaining aggregate wealth accumulation and its distribution (see e.g., Gentry and Hubbard, 1999; Vincenzo Quadrini, 1999), such omissions are likely to be significant. In addition, entrepreneurs’ decisions may account for much of the responsiveness of taxable income to changen marginal tax rates. We focus on impacts of tax rates and, in particular, tax progressivity on the decision to become an “entrepreneur.” While recent research has examined effects of marginal tax rates on investment decisions of entrepreneurial households (Robert Carroll et al., 1997), analysis of effects of taxation on entry is less often pursued. While a proportional tax with a full loss offset will not affect the entry decision for a risk-neutral individual, a progressive schedule with imperfect loss offsets can discourage entry. We find substantial evidence for this effect on entrepreneurship using variation in tax schedules faced by householdn the Panel Study on Income Dynamics (PSID) over the period from 1979 to 1992. While progressive taxation could in principle encourage entry via insurance for risk-averse entrepreneurs through the tax system or through offering greater incentive to avoid taxes

Journal

American Economic ReviewAmerican Economic Association

Published: May 1, 2000

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