Would a Flat Tax Stimulate Entrepreneurship in Germany?: A Behavioural Microsimulation Analysis Allowing for Risk

36 Pages Posted: 9 Apr 2008

See all articles by Frank M. Fossen

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Date Written: April 1, 2008

Abstract

When possible income tax reforms are debated, the suspected impact on entrepreneurship is often used as an argument in favour or against a certain policy. Quantitative ex-ante evaluations of the effect of certain tax reform options on entrepreneurship based on microeconometric research have not been provided by the literature, however. This paper estimates the ex-ante effects of the German tax reform 2000 and of two hypothetical flat tax scenarios on entries into and exits out of self-employment in Germany. For the estimation I apply a microsimulation model which is based on the tax-benefit model STSM and on structural microeconometric models of transitions into and out of self-employment. These structural models include an estimated parameter of risk aversion. The simulation results indicate that flatter tax systems do not encourage, but rather discourage people from choosing self-employment. This is explained by the reduction of entrepreneurs' income risk through progressive taxation.

Keywords: Entrepreneurship, income taxation, risk, tax reform 2000, flat tax

JEL Classification: H24, J23, L26, D81

Suggested Citation

Fossen, Frank M., Would a Flat Tax Stimulate Entrepreneurship in Germany?: A Behavioural Microsimulation Analysis Allowing for Risk (April 1, 2008). DIW Berlin Discussion Paper No. 773, Available at SSRN: https://ssrn.com/abstract=1118282 or http://dx.doi.org/10.2139/ssrn.1118282

Frank M. Fossen (Contact Author)

University of Nevada, Reno ( email )

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United States

HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

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Germany

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