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Are small business owners more successful in avoiding taxes: Evidence from Sweden

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  • Hansson, Åsa

    ()
    (Department of Economics, Lund University)

Abstract

It is commonly argued that high tax rates motivate individuals to start a business as it is easier to avoid and evade taxes if self-employed compared to employed. If this is the case we would expect small business owners to be more responsive to tax rate changes than employees. This study investigates how responsive existing small business owners are to tax rate changes by estimating the elasticities of taxable income, gross income and reported income from business ventures for small business owners and contrast them to corresponding elasticities for employees. This is done by using a particularly rich Swedish data set and the 1990/91 Swedish tax reform as a “natural experiment”. I find that small business owners’ taxable income is about twice as responsive to tax rate changes than employees’. When it comes to reported income from business ventures the difference between small business owners and employees are even greater. For gross disposable income, however, business owners are not more responsive. This is consistent with the hypothesis that small business owners have greater means to shift income between different income sources in order to avoid taxation.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2009:6.

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Length: 20 pages
Date of creation: 19 Apr 2009
Date of revision:
Handle: RePEc:hhs:lunewp:2009_006

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Keywords: Taxable income elasticities; tax avoidance;

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References

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  1. Bruce, Donald, 2002. "Taxes and Entrepreneurial Endurance: Evidence from the Self-Employed," National Tax Journal, National Tax Association, vol. 55(N. 1), pages 5-24, March.
  2. Lindh, Thomas & Ohlsson, Henry, 1996. "Self-Employment and Windfall Gains: Evidence from the Swedish Lottery," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(439), pages 1515-26, November.
  3. William M. Gentry & R. Glenn Hubbard, 2004. ""Success Taxes," Entrepreneurial Entry, and Innovation," NBER Working Papers 10551, National Bureau of Economic Research, Inc.
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  6. Ã…sa Hansson, 2007. "Taxpayers' responsiveness to tax rate changes and implications for the cost of taxation in Sweden," International Tax and Public Finance, Springer, Springer, vol. 14(5), pages 563-582, October.
  7. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2000. "Income Taxes and Entrepreneurs' Use of Labor," NBER Working Papers 6578, National Bureau of Economic Research, Inc.
  8. Apel,M., 1994. "An Expenditure-Based Estimate of Tax Evasion in Sweden," Papers, Uppsala - Working Paper Series 1, Uppsala - Working Paper Series.
  9. Hansson, Ã…sa, 2008. "Income taxes and the probability to become self-employed: The case of Sweden," Ratio Working Papers, The Ratio Institute 122, The Ratio Institute.
  10. Engström, Per & Holmlund, Bertil, 2006. "Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden," Working Paper Series, Uppsala University, Department of Economics 2006:12, Uppsala University, Department of Economics.
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  13. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2001. "Personal Income Taxes and the Growth of Small Firms," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 121-148 National Bureau of Economic Research, Inc.
  14. Carroll, Robert, et al, 2000. "Income Taxes and Entrepreneurs' Use of Labor," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 18(2), pages 324-51, April.
  15. Robert A. Moffitt & Mark Wilhelm, 1998. "Taxation and the Labor Supply: Decisions of the Affluent," NBER Working Papers 6621, National Bureau of Economic Research, Inc.
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  17. Gerald Auten & Robert Carroll, 1999. "The Effect Of Income Taxes On Household Income," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 681-693, November.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Where most of tax avoidance happens: small business owners
    by Economic Logician in Economic Logic on 2009-06-17 08:24:00

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