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Entrepreneurs, Income Taxes, and Investment

  • Robert Carroll
  • Douglas Holtz-Eakin
  • Mark Rider
  • Harvey S. Rosen

This paper investigates the effect of entrepreneurs' personal income tax situations on their capital investment decisions. We examine the income tax returns of a sample of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates for the relatively affluent associated with that law affected their decisions to invest in physical capital. We find that individual income taxes exert a statistically and quantitatively significant influence on investment decisions. In our sample increase in marginal tax rates would reduce the proportion of entrepreneurs who make new capital investments by 10.4 percent, and decrease mean investment expenditures by 9.9 percent.

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File URL: http://www.nber.org/papers/w6374.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6374.

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Date of creation: Jan 1998
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Publication status: published as Carroll, Robert, Douglas Holtz-Eakin, Mark Rider and Harvey S. Rosen. "Income Taxes And Entrepreneurs' Use Of Labor," Journal of Labor Economics, 2000, v18(2,Apr), 324-351.
Handle: RePEc:nbr:nberwo:6374
Note: PE
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  1. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  2. Douglas Holtz-Eakin & David Joulfaian & Harvey Rosen, 1993. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Working Papers 698, Princeton University, Department of Economics, Industrial Relations Section..
  3. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Entrepreneurial Decisions and Liquidity Constraints," NBER Working Papers 4526, National Bureau of Economic Research, Inc.
  4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  5. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
  6. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics 116, Federal Reserve Bank of Minneapolis.
  7. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  8. Engen, Eric M. & Skinner, Jonathan, 1996. "Taxation and Economic Growth," National Tax Journal, National Tax Association, vol. 49(4), pages 617-42, December.
  9. Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, vol. 39(3), pages 347-366, November.
  10. 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.
  11. Lindh, T. & Ohlsson, H., 1995. "Self-Employment and Self-Financing," Papers 1995-01, Uppsala - Working Paper Series.
  12. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
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