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The impact of tax incentives on the economic activity of entrepreneurs

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  • Tuomas Kosonen
  • Jarkko Harju

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 out corporations. 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 Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 42.

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Date of creation: 10 Jan 2013
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Handle: RePEc:fer:wpaper:42

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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, Center for Fiscal Studies 2013:13, Uppsala University, Department of Economics.
  2. Tuomas Kosonen & Jarkko Harju, 2013. "The impact of tax incentives on the economic activity of entrepreneurs," Working Papers 42, Government Institute for Economic Research Finland (VATT).
  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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