Keywords: Self-employment, marginal tax rates, average tax rates
Abstract: This paper adds a new dimension to the literature that uses individual level data to assess the
effects of tax policy on self-employment. Specifically, this study uses repeated cross-section data
from the Surveys of Consumer Finances (SCF) against the background of the tax reforms of 1986
and 1993 to gauge the influence of taxes on self-employment. Using the 1986 and 1993 tax rate
reforms as natural experiments allows for the identification of the effect of taxes on the choice to
become self-employed. The findings of this paper indicate that marginal and average tax rates are
negatively related to the propensity to become self-employed. However, these effects are only
significant for the 1986 tax reforms and are sensitive to the model specification. Other factors,
such as education, industry, wealth, and attitude toward risks, are consistently more important
influences on the choice to become self-employed.
Full paper (512 KB PDF)
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Last update: February 5, 2004