Working Paper: NBER ID: w9015
Authors: Julie Berry Cullen; Roger H. Gordon
Abstract: Entrepreneurial activity is presumed to generate important spillovers, potentially justifying tax subsidies. How does the tax law affect individual incentives? How much of an impact has it had in practice? We first show theoretically that taxes can affect the incentives to be an entrepreneur due simply to differences in tax rates on business vs. wage and salary income, due to differences in the tax treatment of losses vs. profits through a progressive rate structure and through the option to incorporate, and due to risk-sharing with the government. We then provide empirical evidence using U.S. individual tax return data that these aspects of the tax law have had large effects on actual behavior.
Keywords: taxes; entrepreneurial activity; economic growth
JEL Codes: H3; H2; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differences in tax rates on business versus wage income (H32) | incentives for individuals to become entrepreneurs (L26) |
| higher tax rates on personal income (H24) | underreport income through business activities (H26) |
| progressive tax structure (H20) | discourages risk-taking (D81) |
| progressive tax structure (H20) | increases expected tax burden on profits (H32) |
| progressive tax structure (H20) | limited tax relief on losses (K34) |
| option to incorporate (L26) | net subsidy to risk-taking (H23) |
| tax structures that minimize overall tax liability (H21) | allow entrepreneurs to choose (L26) |