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Marginal and Average Tax Rates and the Incentive for Self‐Employment

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  • Martin T. Robson
  • Colin Wren

Abstract

The paper examines how the incentives for individuals to take up self‐employment, rather than paid employment, are influenced by the marginal and average income tax rate. A model is developed in which an individual optimally chooses the supply of labor effort and the amount of tax to evade. Assuming that remuneration is more responsive to effort but that the opportunities for evasion are greater in self‐employment, we find a negative relationship between self‐employment and the marginal tax rate but a positive relationship with the average rate. This is supported by empirical evidence for 15 OECD countries over the 1980s.

Suggested Citation

  • Martin T. Robson & Colin Wren, 1999. "Marginal and Average Tax Rates and the Incentive for Self‐Employment," Southern Economic Journal, John Wiley & Sons, vol. 65(4), pages 757-773, April.
    • Handle: RePEc:wly:soecon:v:65:y:1999:i:4:p:757-773
    DOI: 10.1002/j.2325-8012.1999.tb00198.x
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    References listed on IDEAS

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    Cited by:

    1. Kevin B. Moore, 2004. "The effects of the 1986 and 1993 tax reforms on self-employment," Finance and Economics Discussion Series 2004-05, Board of Governors of the Federal Reserve System (U.S.).
    2. Zsófia L. Bárány, 2017. "Taxation and self-employment," LIS Working papers 723, LIS Cross-National Data Center in Luxembourg.
    3. Bruno Paolo Bosco & Carlo Federico Bosco & Paolo Maranzano, 2025. "Labour responsiveness to income tax changes: empirical evidence from a DID analysis of an income tax treatment in Italy," Empirical Economics, Springer, vol. 69(2), pages 787-828, August.

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