The Wealth Tax and Entrepreneurial Activity

Entrepreneurship is often credited with generating important positive economic externalities. For example, entrepreneurs are often credited for promoting innovation, discovering new markets, and serving as a mechanism for knowledge spillover. Governments increasingly view encouraging entrepreneurship as an important policy objective. Economists have long studied the determinants of entrepreneurship. Taxation has also been found to be important, in particular income taxes and capital taxes. One form of taxation that has not been considered so far, however, is the wealth tax. The wealth tax is likely to influence entrepreneurship negatively, by affecting the pool of capital available to start up businesses as well as reducing the net return to successful entrepreneurship. This paper illustrates the impact of a tax on wealth on entrepreneurship using a simple model of the choice between becoming an entrepreneur or an employee. Actual data is then used to crudely investigate whether the wealth tax indeed has a measurable effect on self-employment in OECD countries, using increasingly sophisticated techniques. A difference-in-difference type estimator using the abolishment of the wealth tax as a ”natural experiment” points to a consistent pattern of a perceptible, but small impact.