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Income taxes and the probability to become self-employed: The case of Sweden

  • Hansson, Åsa

    ()

    (Department of Economics , Lund University and Ratio, Stockholm)

It is widely recognized that entrepreneurial activity plays an important role in promoting new product innovation, discovering new markets, and replacing inefficient incumbents in a process called “creative destruction”, all of which enhance economic growth. Given the importance of entrepreneurship and small business enterprises it is not surprising that policy makers worldwide (and especially in Europe) try to stimulate entrepreneurial activity. One public policy, frequently discussed, is how to design tax policies that stimulate start-ups and entrepreneurship. Existing knowledge about taxes’ effect on entrepreneurial activity and start-ups is relatively limited, however. Existing empirical studies are primarily based on US data and have until recently used aggregated tax measures (e.g., average national tax rates) or hypothetical marginal tax rates and time-series or cross-section data. This study, however, uses a particular rich longitudinal micro-level dataset based on Swedish tax-return information, which makes it possible to track a cohort of individuals over time periods during which tax rate changes took place, and thereby isolate whether real-life individual decisions about self-employment are affected by changes in the tax rates they actually face. In addition, as the tax structure in Sweden is neutral as opposed to the US that encourages risk taking and tax-driven self-employment, studying the effect of income taxes on the probability to become self-employed based on Swedish data provides information about how taxes on self-employment affect self-employment. Contrary to earlier studies based on US data, I find both average and marginal tax rates to negatively impact the probability to become self-employed.

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Paper provided by The Ratio Institute in its series Ratio Working Papers with number 122.

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Length: 39 pages
Date of creation: 04 Jun 2008
Date of revision:
Handle: RePEc:hhs:ratioi:0122
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  1. Per Engström & Bertil Holmlund, 2006. "Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden," CESifo Working Paper Series 1736, CESifo Group Munich.
  2. Bruce, Donald, 2002. "Taxes and Entrepreneurial Endurance: Evidence from the Self-Employed," National Tax Journal, National Tax Association, vol. 55(N. 1), pages 5-24, March.
  3. Nykvist, Jenny, 2005. "Entrepreneurship and Liquidity Constraints: Evidence from Sweden," Working Paper Series 2005:21, Uppsala University, Department of Economics.
  4. Edin, P.-A. & Fredriksson, P., 2000. "LINDA - Longitudinal INdividual DAta for Sweden," Papers 2000:19, Uppsala - Working Paper Series.
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  8. Ashenfelter, Orley C, 1978. "Estimating the Effect of Training Programs on Earnings," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 47-57, February.
  9. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
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  11. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2000. "Income Taxes and Entrepreneurs' Use of Labor," NBER Working Papers 6578, National Bureau of Economic Research, Inc.
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  17. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
  18. 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.
  19. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2001. "Personal Income Taxes and the Growth of Small Firms," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 121-148 National Bureau of Economic Research, Inc.
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  22. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
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