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Taxation of Small Firms under Uncertainty - A Real Option View of Firm Creation

Author

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  • Forsfält, Tomas

    (Dept. of Economics, Stockholm University)

Abstract

This paper addresses the impact of the tax system on the incentives to become self-employed. The new approach here is that the creation of a firm is assumed to be an opportunity but not an obligation, that is, a real option. A comprehensive income tax system and a "dual" tax system of the Nordic type are compared. The comprehensive system Yields a higher threshold with respect to creating a firm than the dual system. Swedish data on disposable income for different socio-economic groups are used to evaluate the relevance of the critical assumptions in the model and to find parameter estimates. A result is that the assumptions are consistent with data for white-collar labor but not for blue-collar labor.

Suggested Citation

  • Forsfält, Tomas, 1999. "Taxation of Small Firms under Uncertainty - A Real Option View of Firm Creation," Research Papers in Economics 1999:17, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:1999_0017
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    More about this item

    Keywords

    income tax; firm creation; occupational choice; real option;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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