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The Impact of Tax Incentives on the Economic Activity of Entrepreneurs

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  • Jarkko Harju
  • Tuomas Kosonen

Abstract

This paper studies the effect of Finnish tax reforms in the mid 1990s on the economic activity and tax avoidance decisions of the owners of small businesses. The reforms reduced income tax rates and increased tax planning incentives for small business owners. They applied only to unincorporated firms. We utilize both a theoretical model and empirical data. The empirical strategy is to use the reforms as a natural experiment to estimate the causal impact of the reforms. The results imply that entrepreneurs react to tax incentives along both real and avoidance margins, while the latter elasticity is larger.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-05/cesifo1_wp4259.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4259.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4259

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Keywords: entrepreneurs; small businesses; tax incidence;

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Cited by:
  1. Edmark, Karin & Gordon, Roger, 2012. "Taxes and the Choice of Organizational Form by Entrepreneurs in Sweden," Working Paper Series 907, Research Institute of Industrial Economics.
  2. Jarkko Harju & Tuomas Kosonen, 2013. "The Impact of Tax Incentives on the Economic Activity of Entrepreneurs," CESifo Working Paper Series 4259, CESifo Group Munich.
  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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