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Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S

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  • Roger H. Gordon
  • Julie Berry Cullen

Abstract

Entrepreneurial activity is presumed to generate important spillovers, potentially justifying tax subsidies. How does the tax law affect individual incentives? How much of an impact has it had in practice? We first show theoretically that taxes can affect the incentives to be an entrepreneur due simply to differences in tax rates on business vs. wage and salary income, due to differences in the tax treatment of losses vs. profits through a progressive rate structure and through the option to incorporate, and due to risk-sharing with the government. We then provide empirical evidence using U.S. individual tax return data that these aspects of the tax law have had large effects on actual behavior.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9015.

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Date of creation: Jun 2002
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Publication status: published as Cullen, Julie Berry and Roger H. Gordon. “Taxes and entrepreneurial risk-taking: theory and evidence for the U.S." Journal of Public Economics 9, 7 (2007): 1479-505.
Handle: RePEc:nbr:nberwo:9015

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  1. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2000. "Personal Income Taxes and the Growth of Small Firms," NBER Working Papers 7980, National Bureau of Economic Research, Inc.
  2. Feldstein, Martin S & Slemrod, Joel, 1980. "Personal Taxation, Portfolio Choice, and the Effect of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 854-66, October.
  3. Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters, National Bureau of Economic Research, Inc, in: The Costs and Benefits of Price Stability, pages 9-46 National Bureau of Economic Research, Inc.
  4. Bird, Edward J., 2001. "Does the welfare state induce risk-taking?," Journal of Public Economics, Elsevier, Elsevier, vol. 80(3), pages 357-383, June.
  5. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey Rosen, 1996. "Income Taxes and Entrepreneur' Use of Labor," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 752, Princeton University, Department of Economics, Industrial Relations Section..
  6. Bruce, Donald, 2000. "Effects of the United States tax system on transitions into self-employment," Labour Economics, Elsevier, Elsevier, vol. 7(5), pages 545-574, September.
  7. David G. Blanchflower, 2000. "Self-Employment in OECD Countries," NBER Working Papers 7486, National Bureau of Economic Research, Inc.
  8. Peter Diamond & Jonathan Gruber, 1997. "Social Security and Retirement in the U.S," NBER Working Papers 6097, National Bureau of Economic Research, Inc.
  9. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, Elsevier, vol. 21(2), pages 129-158, July.
  10. Roger H. Gordon, 1998. "Can High Personal Tax Rates Encourage Entrepreneurial Activity?," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 49-80, March.
  11. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
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