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An Empirical Model of Tax Convexity and Self-Employment

Author

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  • Jean-François Wen

    (University of Calgary)

  • Daniel V. Gordon

    (University of Calgary and University of Stavanger)

Abstract

Do progressive marginal income tax rates discourage self-employment? We assume risk neutrality to construct an implicit surtax on stochastic income relative to steady income, arising from a convex tax schedule. It is computed as part of a structural probit model with earnings equations and a tax simulator. The tax convexity variable and the net-of-tax income difference between self- and paid employment have the predicted signs and high levels of statistical significance for the probability of self-employment. A simulated flat tax reform suggests the tax effects are small. © 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Jean-François Wen & Daniel V. Gordon, 2014. "An Empirical Model of Tax Convexity and Self-Employment," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 471-482, July.
  • Handle: RePEc:tpr:restat:v:96:y:2014:i:3:p:471-482
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    References listed on IDEAS

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    1. Frank Fossen & Viktor Steiner, 2009. "Income taxes and entrepreneurial choice: empirical evidence from two German natural experiments," Empirical Economics, Springer, vol. 36(3), pages 487-513, June.
    2. Ergete Ferede, 2013. "Tax progressivity and self-employment: evidence from Canadian provinces," Small Business Economics, Springer, vol. 40(1), pages 141-153, January.
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    5. Mark Stabile, 2004. "Payroll Taxes and the Decision to be Self-Employed," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 31-53, January.
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    7. Carol Moore & Richard Mueller, 2002. "The transition from paid to self-employment in Canada: the importance of push factors," Applied Economics, Taylor & Francis Journals, vol. 34(6), pages 791-801.
    8. Donald Bruce & Mohammed Mohsin, 2006. "Tax Policy and Entrepreneurship: New Time Series Evidence," Small Business Economics, Springer, vol. 26(5), pages 409-425, June.
    9. Frank M. Fossen, 2007. "Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany," Discussion Papers of DIW Berlin 705, DIW Berlin, German Institute for Economic Research.
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    13. Le, Anh T, 1999. " Empirical Studies of Self-Employment," Journal of Economic Surveys, Wiley Blackwell, vol. 13(4), pages 381-416, September.
    14. Cameron,A. Colin & Trivedi,Pravin K., 2008. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9787111235767, January.
    15. Cecilia García-Peñalosa & Jean-François Wen, 2008. "Redistribution and entrepreneurship with Schumpeterian growth," Journal of Economic Growth, Springer, vol. 13(1), pages 57-80, March.
    16. Rees, Hedley & Shah, Anup, 1986. "An Empirical Analysis of Self-employment in the U.K," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(1), pages 95-108, January.
    17. Martin T. Robson & Colin Wren, 1999. "Marginal and Average Tax Rates and the Incentive for Self-Employment," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 757-773, April.
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    Citations

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    Cited by:

    1. Zsófia L. Bárány, 2017. "Taxation and self-employment," LIS Working papers 723, LIS Cross-National Data Center in Luxembourg.
    2. Jean-Marie Dufour & Joachim Wilde, 2018. "Weak identification in probit models with endogenous covariates," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 102(4), pages 611-631, October.
    3. repec:kap:itaxpf:v:25:y:2018:i:2:d:10.1007_s10797-017-9456-1 is not listed on IDEAS
    4. Fossen, Frank M. & Rees, Ray & Rostam-Afschar, Davud & Steiner, Viktor, 2017. "How do entrepreneurial portfolios respond to income taxation?," Hohenheim Discussion Papers in Business, Economics and Social Sciences 12-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    5. repec:kap:sbusec:v:49:y:2017:i:2:d:10.1007_s11187-017-9840-3 is not listed on IDEAS
    6. repec:kap:sbusec:v:51:y:2018:i:2:d:10.1007_s11187-018-0005-9 is not listed on IDEAS
    7. Fossen, Frank M. & Rees, Ray & Rostam-Afschar, Davud & Steiner, Viktor, 2017. "How do entrepreneurial portfolios respond to income taxation?," Hohenheim Discussion Papers in Business, Economics and Social Sciences 12-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.

    More about this item

    Keywords

    tax convexity; marginal income tax rates; self-employment; tax reform;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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