This paper investigates the effect of entrepreneurs' personal income tax situations on the growth rates of their enterprises. We analyze the personal 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 the growth of their firms as measured by gross receipts. We find that individual income taxes exert a statistically and quantitatively significant influence on firm growth rates. Raising the sole proprietor's tax price (one minus the marginal tax rate) by 10 percent increases receipts by about 8.4 percent. This finding is consistent with the view that raising income tax rates discourages the growth of small businesses.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7980.
Length: Date of creation: Oct 2000 Date of revision: Handle: RePEc:nbr:nberwo:7980
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Chapter
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.
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Find related papers by JEL classification: J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
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