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Would a Flat Tax Stimulate Entrepreneurship in Germany?: A Behavioural Microsimulation Analysis Allowing for Risk

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  • Frank M. Fossen

Abstract

When 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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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.81491.de/dp773.pdf
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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 773.

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Length: 34 p.
Date of creation: 2008
Date of revision:
Publication status: Published in: Fiscal Studies 30 (2009) No.2, 179-218
Handle: RePEc:diw:diwwpp:dp773

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Keywords: Entrepreneurship; income taxation; risk; tax reform 2000; flat tax;

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