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Can High Personal Tax Rates Encourage Entrepreneurial Activity?

  • Roger H. Gordon

    (International Monetary Fund)

When the top personal tax rates are above the corporate rate, high income individuals have an incentive to reclassify their earnings as corporate rather than personal income for tax purposes. At least U.S. tax law imposes strict limits on the extent to which employees in publicly traded corporations can engage in such income shifting. However, entrepreneurs setting up new firms can easily reclassify their income for tax purposes. This tax incentive therefore favors entrepreneurial activity. In the United States, these tax incentives were huge during the 1950s and 1960s, though they have been much smaller since then.

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Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 45 (1998)
Issue (Month): 1 (March)
Pages: 49-80

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Handle: RePEc:pal:imfstp:v:45:y:1998:i:1:p:49-80
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