Income Taxes and Entrepreneurs' Use of Labor
AbstractThis paper investigates the effect of entrepreneurs' personal income tax situations on their use of labor. We analyze the income tax returns of a large number of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates associated with that law affected their decisions to hire labor and the size of their wage bills. We find that individual income taxes exert a statistically and quantitatively significant influence on the probability that an entrepreneur hires workers. Raising the entrepreneur's tax price' (one minus the marginal tax rate) by 10 percent raises the mean probability of hiring workers by about 12 percent. Further, conditional on hiring employees, taxes also influence the total wage payments to those workers. The elasticity of the median wage bill with respect to the tax price is about 0.37.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6578.
Date of creation: May 2000
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Other versions of this item:
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
This paper has been announced in the following NEP Reports:
- NEP-PUB-1998-06-03 (Public Finance)
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- Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994.
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- Marc Cowling & Mark Taylor & Peter Mitchell, 2004. "Job Creators," Manchester School, University of Manchester, vol. 72(5), pages 601-617, 09.
- Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
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