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Income Taxes and Entrepreneurial Choice: Empirical Evidence from Germany

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  • Frank M. Fossen
  • Viktor Steiner

Abstract

Entrepreneurial activity is often regarded as an engine for economic growth and job creation. Through tax policy, governments possess a potential lever to influence the decisions of economic agents to start and close small businesses. In Germany, the top marginal income tax rates were reduced exclusively for entrepreneurs in 1994 and 1999/2000. These tax reforms provided two naturally defined control groups that enable us to exploit the legislation changes as "natural experiments". First, the tax rate reductions did not apply to freelance professionals (Freiberufler), and second, entrepreneurs with earnings below a certain threshold were not affected. Using data from two different sources, the SOEP and the Mikrozensus (LFS), we analyse the effect of the tax cuts on transitions into and out of self-employment and on the rate of self-employment. We apply a "difference-in-difference-in-difference" estimation technique within a discrete time hazard rate model. The results indicate that the decrease in tax rates did not have a significant effect on the self-employment decision.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 582.

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Length: 46 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp582

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Keywords: Taxation; entrepreneurship; natural experiment; difference-in-difference-in-difference estimation;

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References

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Citations

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Cited by:
  1. Mina Baliamoune-Lutz & Pierre Garello, 2011. "Tax Structure And Entrepreneurship," Post-Print halshs-00706942, HAL.
  2. Frank M. Fossen, 2007. "Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany," Discussion Papers of DIW Berlin 705, DIW Berlin, German Institute for Economic Research.
  3. Ruud A. de Mooij & Gaëtan Nicodème, 2007. "Corporate tax policy, entrepreneurship and incorporation in the EU," European Economy - Economic Papers 269, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Daniela Glocker & Viktor Steiner, 2007. "Self-Employment - a Way to End Unemployment?: Empirical Evidence from German Pseudo-Panel Data," Discussion Papers of DIW Berlin 661, DIW Berlin, German Institute for Economic Research.
  5. Frank M. Fossen, 2012. "Risk Attitudes and Private Business Equity," Discussion Papers of DIW Berlin 1209, DIW Berlin, German Institute for Economic Research.
  6. Berthold, Norbert & Kullas, Matthias, 2006. "Unternehmer: der Treibstoff des Wachstumsmotors!," Wirtschaftswissenschaftliche Beiträge 89, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  7. Berthold, Norbert & Kullas, Matthias & Neumann, Michael, 2007. "Motivatoren und Demotivatoren für Unternehmer im deutschen Maschinen- und Anlagenbau," Wirtschaftswissenschaftliche Beiträge 98, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  8. Mawussé K. N. Okey, 2011. "Institutional Reforms, Private Sector, and Economic Growth in Africa," Working Paper Series UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).

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