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Income Taxes and Entrepreneurs' Use of Labor

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  • Carroll, Robert
  • Holtz-Eakin, Douglas
  • Rider, Mark
  • Rosen, Harvey S

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.

Suggested Citation

  • Carroll, Robert & Holtz-Eakin, Douglas & Rider, Mark & Rosen, Harvey S, 2000. "Income Taxes and Entrepreneurs' Use of Labor," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 324-351, April.
    • Handle: RePEc:ucp:jlabec:v:18:y:2000:i:2:p:324-51
    DOI: 10.1086/209961
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    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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