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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 corporations out. We use a difference-in-differences 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18442.

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Date of creation: Oct 2012
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Handle: RePEc:nbr:nberwo:18442

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Find related papers by JEL classification:

• H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
• H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
• H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

This paper has been announced in the following NEP Reports:

• NEP-ALL-2012-10-13 (All new papers)
• NEP-ENT-2012-10-13 (Entrepreneurship)
• NEP-PBE-2012-10-13 (Public Economics)
• NEP-PUB-2012-10-13 (Public Finance)

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