Income taxes and the probability to become self-employed: The case of Sweden
AbstractIt is widely recognized that entrepreneurial activity plays an important role in promoting new product innovation, discovering new markets, and replacing inefficient incumbents in a process called “creative destruction”, all of which enhance economic growth. Given the importance of entrepreneurship and small business enterprises it is not surprising that policy makers worldwide (and especially in Europe) try to stimulate entrepreneurial activity. One public policy, frequently discussed, is how to design tax policies that stimulate start-ups and entrepreneurship. Existing knowledge about taxes’ effect on entrepreneurial activity and start-ups is relatively limited, however. Existing empirical studies are primarily based on US data and have until recently used aggregated tax measures (e.g., average national tax rates) or hypothetical marginal tax rates and time-series or cross-section data. This study, however, uses a particular rich longitudinal micro-level dataset based on Swedish tax-return information, which makes it possible to track a cohort of individuals over time periods during which tax rate changes took place, and thereby isolate whether real-life individual decisions about self-employment are affected by changes in the tax rates they actually face. In addition, as the tax structure in Sweden is neutral as opposed to the US that encourages risk taking and tax-driven self-employment, studying the effect of income taxes on the probability to become self-employed based on Swedish data provides information about how taxes on self-employment affect self-employment. Contrary to earlier studies based on US data, I find both average and marginal tax rates to negatively impact the probability to become self-employed.
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Bibliographic InfoPaper provided by The Ratio Institute in its series Ratio Working Papers with number 122.
Length: 39 pages
Date of creation: 04 Jun 2008
Date of revision:
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More information through EDIRC
Self-employment; entrepreneurship; small business; taxation; wealth;
Find related papers by JEL classification:
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-07 (All new papers)
- NEP-EEC-2008-06-07 (European Economics)
- NEP-ENT-2008-06-07 (Entrepreneurship)
- NEP-PBE-2008-06-07 (Public Economics)
- NEP-PUB-2008-06-07 (Public Finance)
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