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Taxes and Entrepreneurship reviews the existing empirical literature on the impacts of tax policies on entrepreneurial activity and presents an agenda for future research.
This paper studies the effects of income taxation on entrepreneurship, empirically and in a structural macro model with entrepreneurial choice. Combining state-level tax data with household and firm data we document that higher and more progressive taxation has a strong negative impact on entrepreneurial activity across time and space. A one percentage point increase in the tax rate at median income leads to 4.5% fewer entrepreneurs and 1.5% fewer employees at small firms, whereas a 1% increase in the progressivity of the tax schedule leads to 1.0% fewer entrepreneurs and 0.2% fewer employees at small firms. To explain this relationship and to evaluate the impact of taxation on output and welfare, we develop a life-cycle, incomplete markets model of the labor market with entrepreneurial choice. The model generates elasticities of entrepreneurship to taxation that are similar to those found in the empirical analysis. Progressive taxation lowers both the risk and return to becoming an entrepreneur. However, quantitatively the return effect dominates. We find that converting to a flat tax (while keeping the level of taxes constant) would increase the number of entrepreneurs by 25% and output by 4.5%. Under the assumption of a small open economy, the level of tax progressivity that maximizes steady state welfare is, however, only slightly lower than for the current U.S. tax code. Allowing for general equilibrium effects, the socially optimal tax code is about half as progressive as today and would lead to a 0.4% welfare gain if implemented.

Tax Reform

United States. Congress. Senate. Committee on Small Business and Entrepreneurship

Published: 2017

Total Pages: 120


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Part of a series that presents recent research on the effects of taxation on economic performance and analyses of the effects of potential tax reforms, this volume includes: an evaluation of Medicaid in the 1980s; medical savings accounts; and implications of a broad-based consumption tax.
This volume provides a comprehensive review of the theoretical concepts and empirical models of entrepreneurship from a non-conventional perspective. It makes recent advances in the theory and application of the economics of entrepreneurship accessible to a wider audience, including policy makers. It emphasizes data requirements to advance the future research agenda and to allow for a better design and monitoring of entrepreneurial policy.
The Tax Foundation's State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states' tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems, and provides a roadmap to improving these structures.
This publication examines the taxation of SMEs in OECD countries and covers a broad range of SME taxation issues, including possible effects of taxation on the creation and growth of SMEs, and considerations arising from a relatively high compliance burden.
The Tax Foundation's State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states' tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems, and provides a roadmap to improving these structures.