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The impact of tax incentives on the economic activity of entrepreneurs

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  • Kosonen, Tuomas
  • Harju, Jarkko

Abstract

Based on existing evidence, we know little about how the taxation of small business owners affects their economic activity. This paper studies the effect of two Finnish tax reforms, in 1997 and 1998, on the effort decisions of the owners of small businesses, utilizing both theoretical model and empirical data. The reforms reduced the income tax rates of small business owners and applied only to unincorporated firms, leaving out corporations. We use a difference-indifferences strategy to estimate the causal impact of tax incentives on the economic activity of small businesses. The results imply that lighter taxation leads to an increase in the turnover of firms that we interpret as an increase in effort exerted by their owners.

Suggested Citation

  • Kosonen, Tuomas & Harju, Jarkko, 2013. "The impact of tax incentives on the economic activity of entrepreneurs," Working Papers 42, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:42
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    Cited by:

    1. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 5367, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Lahiri, Bidisha & Daramola, Richard, 2023. "Effects of credit and labor constraints on microenterprises and the unintended impact of changes in household endowments: Use of threshold estimation to detect heterogeneity," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 21-38.
    3. Jarkko Harju & Tuomas Kosonen, 2012. "The Impact of Tax Incentives on the Economic Activity of Entrepreneurs," Working Papers 1220, Oxford University Centre for Business Taxation.
    4. Henrekson, Magnus & Sanandaji, Tino, 2016. "Owner-Level Taxes and Business Activity," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 12(1), pages 1-94, March.
    5. Sergey M. Drobyshevsky & Andrew V. Korytin & Natalya S. Kostrykina, 2023. "Effectiveness Assessment of Tax Benefits in Terms of Reduced Rates of Insurance Contributions for IT-companies in Russia," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 9(3), pages 376-397.
    6. Edmark, Karin & Gordon, Roger, 2012. "Taxes and the Choice of Organizational Form by Entrepreneurs in Sweden," Working Paper Series 907, Research Institute of Industrial Economics.
    7. Martner Fanta, Ricardo & Gonzales, Ivonne & Podestá, Andrea, 2013. "Políticas fiscales para el crecimiento y la igualdad," Macroeconomía del Desarrollo 5372, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. Jarkko Harju & Tuomas Matikka, 2013. "The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not?," Working Papers 1313, Oxford University Centre for Business Taxation.
    9. Jarkko Harju & Tuomas Matikka, 2016. "The elasticity of taxable income and income-shifting: what is “real” and what is not?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 640-669, August.
    10. Irfan Hameed & Umer Zaman & Idrees Waris & Owais Shafique, 2021. "A Serial-Mediation Model to Link Entrepreneurship Education and Green Entrepreneurial Behavior: Application of Resource-Based View and Flow Theory," IJERPH, MDPI, vol. 18(2), pages 1-19, January.
    11. Siegloch, Sebastian, 2014. "Employment Effects of Local Business Taxes," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100325, Verein für Socialpolitik / German Economic Association.
    12. Elert, Niklas & Henrekson, Magnus & Stenkula, Mikael, 2017. "Institutional Reform for Innovation and Entrepreneurship: An Agenda for Europe," Working Paper Series 1150, Research Institute of Industrial Economics, revised 16 Feb 2017.

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    More about this item

    Keywords

    Entrepreneurs; small businesses; tax incidence; Labour market; Työmarkkinat; Taxation; Verotus; Taxation and Social Transfers; Julkisen talouden rahoitus ja tulonsiirrot; H220 - Taxation and Subsidies: Incidence; H240 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes; H250 - Business Taxes and Subsidies including sales and value-added (VAT);
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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