Tax Policy and Entrepreneurship: New Time Series Evidence

Abstract

Have tax policies affected entrepreneurial activity in the U.S.? We extend the time series literature on this topic by using more recent data and modern econometric techniques to examine the importance of federal income, payroll, capital gains, corporate income, and estate taxes on self-employment rates. Regression results show that most of these taxes have significant but small effects on self-employment activity. A battery of cointegration and causality tests confirms the general finding that taxes can have significant influences on entrepreneurship, but they are likely to be ineffective tools for generating meaningful changes in entrepreneurial activity. Copyright Springer 2006self-employment, tax policy, time series analysis, H2, J2,

Taxation and entrepreneurship in a welfare state

“…The method of cointegration was first applied to self-employment by Parker (1996), and this approach is used here as well. 6 In line with Bruce and Mohsin (2006), we find moderate but non-negligible, statistically significant effects of taxation. In other words, Swedish data do not give rise to stronger…”

“…Bruce and Mohsin (2006) conduct the first time-series study that tries to address 4 See, e.g., Adema and Ladaique (2005) and Esping-Andersen (1990). 5 See Esping-Andersen (1990) for an early discussion about different welfare systems.…”

“…6 Unlike Bruce and Mohsin (2006), Parker (1996) does not focus specifically on the effects of taxation. Parker and Robson (2004) followed up on Parker's paper, however, covering five Western countries and analyzing two tax rates in a more advanced panel cointegration analysis.…”

Tax Structure and Entrepreneurship

“…For example, based on an empirical study using data from 14 European countries over the period 1988 2001, Da Rin et al (2006) report that lowering capital gains tax, reducing labor regulations, and opening a new venture stock market are the three most effective policies to raise the proportion of high tech and early stage ventures. Using US data Bruce and Mohsin (2006) find that reducing the capital gains tax rate by 1 percentage point is associated with an increase from 0.11 to 0.15 percentage points in self employment rates.…”

“…The authors find, for example, that allowing a deduction of business losses on personal income tax return would raise entrepreneurial risk taking by 50% to 100%, while reducing personal tax rates by 5 percentage points, across income brackets, would reduce entrepreneurial risk taking by about 40%. Along these lines, there is an important empirical literature on how taxes affect start ups and the success of enterprises that are financed by venture capital (Gompers and Lerner, 1998;Keuschnigg and Nielsen, 2004;Bruce and Mohsin, 2006). The bulk of the evidence points to a negative link between venture capital funding and taxes.…”