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The Impact of Tax Incentives on the Economic Activity of Entrepreneurs

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  • 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-indifferences 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.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1220.

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Date of creation: 2012
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Handle: RePEc:btx:wpaper:1220

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Keywords: Entrepreneurs; small businesses; tax incidence;

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References

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Cited by:
  1. Edmark, Karin & Gordon, Roger, 2013. "Taxes and the Choice of Organizational Form by Entrepreneurs in Sweden," Working Paper Series 982, Research Institute of Industrial Economics.
  2. Jarkko Harju & Tuomas Kosonen, 2012. "The Impact of Tax Incentives on the Economic Activity of Entrepreneurs," NBER Working Papers 18442, National Bureau of Economic Research, Inc.
  3. Jarkko Harju & Tuomas Matikka, 2013. "The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not?," Working Papers 1313, Oxford University Centre for Business Taxation.

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