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Would a Flat Tax Stimulate Entrepreneurship in Germany?: A Behavioural Microsimulation Analysis Allowing for Risk

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  • Frank M. Fossen

Abstract

When possible income tax reforms are debated, the suspected impact on entrepreneurship is often used as an argument in favour or against a certain policy. Quantitative ex-ante evaluations of the effect of certain tax reform options on entrepreneurship based on microeconometric research have not been provided by the literature, however. This paper estimates the ex-ante effects of the German tax reform 2000 and of two hypothetical flat tax scenarios on entries into and exits out of self-employment in Germany. For the estimation I apply a microsimulation model which is based on the tax-benefit model STSM and on structural microeconometric models of transitions into and out of self-employment. These structural models include an estimated parameter of risk aversion. The simulation results indicate that flatter tax systems do not encourage, but rather discourage people from choosing self-employment. This is explained by the reduction of entrepreneurs' income risk through progressive taxation.

Suggested Citation

  • Frank M. Fossen, 2008. "Would a Flat Tax Stimulate Entrepreneurship in Germany?: A Behavioural Microsimulation Analysis Allowing for Risk," Discussion Papers of DIW Berlin 773, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp773
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    Keywords

    Entrepreneurship; income taxation; risk; tax reform 2000; flat tax;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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