Entrepreneurship and Taxation: Empirical Evidence

Abstract

The impact of taxation upon entrepreneurs is an under-researched area of study.By looking at tax return information, the impact of an entrepreneur's income tax circumstances are investigated in relation to the effect on business growth, the impact on labor hiring, and the effect on the volume of physical investment they undertake. Several conceptual issues on this topic are discussed, including the theoretical considerations regarding taxation and the relevant tax rate considerations and deductions.The data for this study were collected from the Statistics of Income Individual Tax Files for 1985 and 1988, from the Internal Revenue Service, which provided the tax information for 62,159 taxpayers in both years.The two data collection dates are significant because the enactment of the Tax Reform Act of 1986 (TRA86) interrupts these two times, allowing researchers the opportunity to study the impact of TRA86. The characteristics of the data set are discussed, as are possible limitations created by the set.The influence of taxation on small firm growth, on capital investment by entrepreneurs, and on hiring practices is explored.The overall findings indicate that taxation does matter, impacting the speed of firm development, the investment in capital assets, and the hiring of workers.Future strategies to promote entrepreneurship are presented. (AKP)

Keywords: IRS Statistics of Income Individual Tax Files, Tax Reform Act of 1986, Employment rates, Taxes, Sole proprietorships, Tax policies, Hiring, Firm growth, Public policies, Capital investments