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Income Taxes and Entrepreneurs' Use of Labor

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  • Carroll, Robert, et al
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    Abstract

    We investigate the effect of entrepreneurs' personal taxes on their use of labor, analyze the tax returns of sole proprietors before and after the Tax Reform Act of 1986, and determine how the substantial reductions in marginal tax rates affected their hiring decisions and wage bills. Individual income taxes exert a statistically and quantitatively significant influence on the probability of hiring workers. Raising the entrepreneur's "tax price" by 10% raises the mean probability of hiring by about 12%. Further, taxes influence total wage payments to workers. The tax-price elasticity of the median wage bill is about .37. Copyright 2000 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Labor Economics.

    Volume (Year): 18 (2000)
    Issue (Month): 2 (April)
    Pages: 324-51

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    Handle: RePEc:ucp:jlabec:v:18:y:2000:i:2:p:324-51

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    1. Amemiya, Takeshi, 1982. "Two Stage Least Absolute Deviations Estimators," Econometrica, Econometric Society, vol. 50(3), pages 689-711, May.
    2. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
    3. Van Praag, C Mirjam & Van Ophem, Hans, 1995. "Determinants of Willingness and Opportunity to Start as an Entrepreneur," Kyklos, Wiley Blackwell, vol. 48(4), pages 513-40.
    4. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1994. "Entrepreneurial Decisions and Liquidity Constraints," NBER Working Papers 4526, National Bureau of Economic Research, Inc.
    5. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
    6. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
    7. Jefferson, Philip N, 1997. "Unemployment and Financial Constraints Faced by Small Firms," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 108-19, January.
    8. Lindh, Thomas & Ohlsson, Henry, 1996. "Self-Employment and Windfall Gains: Evidence from the Swedish Lottery," Economic Journal, Royal Economic Society, vol. 106(439), pages 1515-26, November.
    9. Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, vol. 39(3), pages 347-366, November.
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