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The impact of tax incentives on the economic activity of entrepreneurs

Listed author(s):
  • Tuomas Kosonen
  • Jarkko Harju

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.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 42.

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Date of creation: 10 Jan 2013
Handle: RePEc:fer:wpaper:42
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