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Marginal and Average Tax Rates and the Incentive for Self-Employment

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  • Martin T. Robson
  • Colin Wren
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    Abstract

    The paper examines how the incentives for individuals to take up self-employment, rather than paid employment, are influenced by the marginal and average income tax rate. A model is developed in which an individual optimally chooses the supply of labor effort and the amount of tax to evade. Assuming that remuneration is more responsive to effort but that the opportunities for evasion are greater in self-employment, we find a negative relationship between self-employment and the marginal tax rate but a positive relationship with the average rate. This is supported by empirical evidence for 15 OECD countries over the 1980s.

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    Bibliographic Info

    Article provided by Southern Economic Association in its journal Southern Economic Journal.

    Volume (Year): 65 (1999)
    Issue (Month): 4 (April)
    Pages: 757-773

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    Handle: RePEc:sej:ancoec:v:65:4:y:1999:p:757-773

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    Web page: http://www.southerneconomic.org/
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    Cited by:
    1. Kathrin Goeggel & Johannes Graeb & Friedhelm Pfeiffer, 2007. "Selbständigkeit in Europa 1991-2003: Empirische Evidenz mit Länderdaten," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 227(2), pages 153-167, April.
    2. Ergete Ferede, 2013. "Tax progressivity and self-employment: evidence from Canadian provinces," Small Business Economics, Springer, vol. 40(1), pages 141-153, January.
    3. Yannis Georgellis & Howard J. Wall, 2004. "Entrepreneurship and the policy environment," Working Papers 2002-019, Federal Reserve Bank of St. Louis.
    4. Hansson, Åsa, 2005. "The Wealth Tax and Entrepreneurial Activity," Working Papers 2005:43, Lund University, Department of Economics.
    5. Mária Lackó, 2004. "Tax Rates and Corruption: Labour-market and Fiscal Effects. Empirical cross-country comparisons on OECD and transition countries," wiiw Research Reports 309, The Vienna Institute for International Economic Studies, wiiw.
    6. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2000. "Microdata Panel Data and Public Policy: National and Cross-National Perspectives," Center for Policy Research Working Papers 29, Center for Policy Research, Maxwell School, Syracuse University.
    7. Concepción Román & Emilio Congregado & José Millán, 2011. "Dependent self-employment as a way to evade employment protection legislation," Small Business Economics, Springer, vol. 37(3), pages 363-392, October.
    8. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2001. "Personal Income Taxes and the Growth of Small Firms," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 121-148 National Bureau of Economic Research, Inc.
    9. Douhan, Robin & Henrekson, Magnus, 2007. "The Political Economy of Entrepreneurship: An Introduction," Working Paper Series 688, Research Institute of Industrial Economics.
    10. Maria Lacko, 2007. "Interrelationships of the hidden economy and some visible segments of the labour market," IEHAS Discussion Papers 0707, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    11. Mathur, Aparna, 2006. "Health Insurance and Job Creation by the Self-Employed," Working paper 375, Regulation2point0.
    12. Roberto Torrini, 2002. "Cross-country differences in self-employment rates: the role of institutions," Temi di discussione (Economic working papers) 459, Bank of Italy, Economic Research and International Relations Area.
    13. Emilio Congregado & Vicente Esteve & Antonio A. Golpe, 2013. "From complements to substitutes: Structural breaks in the elasticity of substitution between paid-employment and self-employment in the US," Working Papers 1319, Department of Applied Economics II, Universidad de Valencia.
    14. Lackó, Mária, 2006. "Az adóráták és a korrupció hatásai a munkapiacra. Keresztmetszeti összehasonlító elemzés az OECD-országokon
      [The effects of tax rates and corruption on the labour market. A cross-section
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 961-985.
    15. Stenkula, Mikael, 2009. "Taxation and Entrepreneurship in a Welfare State," Working Paper Series 800, Research Institute of Industrial Economics.
    16. Lackó, Mária, 2009. "Az adóráták és a korrupció hatása az adóbevételekre. Az OECD-országok összehasonlítása, 2000-2004
      [The effect of tax rates and corruption on tax receipts. A comparison of the OECD count
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 526-545.
    17. repec:clg:wpaper:2014-33 is not listed on IDEAS
    18. Henrekson, Magnus & Stenkula, Mikael, 2009. "Entrepreneurship and Public Policy," Working Paper Series 804, Research Institute of Industrial Economics.

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