Personal Income Taxes and the Growth of Small Firms
Office of Tax Analysis
Syracuse University; National Bureau of Economic Research (NBER)
Georgia State University - Department of Economics
Harvey S. Rosen
Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)
NBER Working Paper No. w7980
This paper investigates the effect of entrepreneurs' personal income tax situations on the growth rates of their enterprises. We analyze the personal 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 the growth of their firms as measured by gross receipts. We find that individual income taxes exert a statistically and quantitatively significant influence on firm growth rates. Raising the sole proprietor's tax price (one minus the marginal tax rate) by 10 percent increases receipts by about 8.4 percent. This finding is consistent with the view that raising income tax rates discourages the growth of small businesses.
Number of Pages in PDF File: 35
Date posted: November 11, 2003
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