Working Paper: NBER ID: w18442
Authors: Jarkko Harju; Tuomas Kosonen
Abstract: Based on existing evidence, we know little about how the taxation of small business owners affects their economic activity. This paper studies the effect of two Finnish tax reforms, in 1997 and 1998, on the effort decisions of the owners of small businesses utilizing both theoretical model and empirical data. The reforms reduced the income tax rates of small business owners and applied only to unincorporated firms, leaving corporations out. We use a difference-in-differences strategy to estimate the causal impact of tax incentives on the economic activity of small businesses. The results imply that lighter taxation leads to an increase in the turnover of firms that we interpret as an increase in effort exerted by their owners.
Keywords: Tax incentives; Economic activity; Entrepreneurs; Small businesses
JEL Codes: H22; H24; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in the marginal tax rate for unincorporated firms (H32) | Increase in turnover (M51) |
| Reduction in the marginal tax rate for unincorporated firms (H32) | Increase in effort exerted by entrepreneurs (L26) |
| Tax incentives (H20) | Influence firm behavior (D21) |
| Tax reforms (H29) | Changes in legal form switching (K29) |
| Tax reforms (H29) | No significant effect on labor demand (J29) |