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Personal Income Taxes and the Growth of Small Firms

In: Tax Policy and the Economy, Volume 15

Author Info

Listed author(s):
  • Robert Carroll
  • Douglas Holtz-Eakin
  • Mark Rider
  • Harvey S. Rosen

Abstract

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.

(This abstract was borrowed from another version of this item.)

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This chapter was published in:
  • James M. Poterba, 2001. "Tax Policy and the Economy, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number pote01-1, June.
    • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10856.
    Handle: RePEc:nbr:nberch:10856
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    National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

    Phone: 617-868-3900
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    Other versions of this item:

    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

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 1998. "Entrepreneurs, Income Taxes, and Investment," NBER Working Papers 6374, National Bureau of Economic Research, Inc.
    2. Eric M. Engen & Jonathan Skinner, 1996. "Taxation and Economic Growth," NBER Working Papers 5826, National Bureau of Economic Research, Inc.
    3. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1994. "Entrepreneurial Decisions and Liquidity Constraints," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 334-347, Summer.
    4. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
    5. Blau, David M, 1987. "A Time-Series Analysis of Self-employment in the United State," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 445-467, June.
    6. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-827, August.
    7. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    8. Engen, Eric M. & Skinner, Jonathan, 1996. "Taxation and Economic Growth," National Tax Journal, National Tax Association, vol. 49(4), pages 617-642, December.
    9. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    10. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-674, August.
    11. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey Rosen, 1996. "Income Taxes and Entrepreneur' Use of Labor," Working Papers 752, Princeton University, Department of Economics, Industrial Relations Section..
    12. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
    13. 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.
    14. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
    15. Van Praag, C Mirjam & Van Ophem, Hans, 1995. "Determinants of Willingness and Opportunity to Start as an Entrepreneur," Kyklos, Wiley Blackwell, vol. 48(4), pages 513-540.
    16. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
    17. Carroll, Robert, et al, 2000. "Income Taxes and Entrepreneurs' Use of Labor," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 324-351, April.
    18. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
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