Would a Flat Tax Stimulate Entrepreneurship in Germany?: A Behavioural Microsimulation Analysis Allowing for Risk
AbstractWhen possible income tax reforms are debated, the suspected impact on entrepreneurship is often used as an argument in favour or against a certain policy. Quantitative ex-ante evaluations of the effect of certain tax reform options on entrepreneurship based on microeconometric research have not been provided by the literature, however. This paper estimates the ex-ante effects of the German tax reform 2000 and of two hypothetical flat tax scenarios on entries into and exits out of self-employment in Germany. For the estimation I apply a microsimulation model which is based on the tax-benefit model STSM and on structural microeconometric models of transitions into and out of self-employment. These structural models include an estimated parameter of risk aversion. The simulation results indicate that flatter tax systems do not encourage, but rather discourage people from choosing self-employment. This is explained by the reduction of entrepreneurs' income risk through progressive taxation.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 773.
Length: 34 p.
Date of creation: 2008
Date of revision:
Publication status: Published in: Fiscal Studies 30 (2009) No.2, 179-218
Entrepreneurship; income taxation; risk; tax reform 2000; flat tax;
Find related papers by JEL classification:
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-12 (All new papers)
- NEP-CMP-2008-04-12 (Computational Economics)
- NEP-ENT-2008-04-12 (Entrepreneurship)
- NEP-PBE-2008-04-12 (Public Economics)
- NEP-PUB-2008-04-12 (Public Finance)
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