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Income Taxes and Entrepreneur' Use of Labor

Author

Listed:
  • Robert Carroll

    (Ernst & Young)

  • Douglas Holtz-Eakin

    (Syracuse University)

  • Mark Rider

    (United States Department of Treasury)

  • Harvey Rosen

    (Princeton University)

Abstract

This paper investigates the effect of entrepreneurs' personal income tax situations on their use of labor. We analyze the income tax returns of a large number of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates associated with that law affected their decisions to hire labor and the size of their wage bills. We find that individual income taxes exert a statistically and quantitatively significant influence on the probability that an entrepreneur hires workers. A 6 percentage point reduction in the marginal tax rate of an entrepreneur in the 39.6 percent bracket induces an approximately 1 1.8 percent increase in the probability that he hires labor. Further, conditional on hiring employees, taxes also influence the total wage payments to those workers. The elasticity of the median wage bill with respect to the marginal tax rate is about 0.397.

Suggested Citation

  • Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey Rosen, 1996. "Income Taxes and Entrepreneur' Use of Labor," Working Papers 752, Princeton University, Department of Economics, Industrial Relations Section..
  • Handle: RePEc:pri:indrel:373
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    References listed on IDEAS

    as
    1. Davis, Steven J & Haltiwanger, John & Schuh, Scott, 1996. "Small Business and Job Creation: Dissecting the Myth and Reassessing the Facts," Small Business Economics, Springer, vol. 8(4), pages 297-315, August.
    2. Marc Cowling & Mark Taylor & Peter Mitchell, 2004. "Job Creators," Manchester School, University of Manchester, vol. 72(5), pages 601-617, September.
    3. Buchinsky, Moshe, 1995. "Estimating the asymptotic covariance matrix for quantile regression models a Monte Carlo study," Journal of Econometrics, Elsevier, vol. 68(2), pages 303-338, August.
    4. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
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    More about this item

    Keywords

    income taxes; entrepreneurs; labor;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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