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Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S

Posted: 24 Nov 2009  

Julie Berry Cullen

affiliation not provided to SSRN

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: 2002

Abstract

Current literature suggests that informationspillovers, particularly those resulting from entrepreneurial activity,generate economic growth.In light of these productive spillovers, it isreasonable to subsidize entrepreneurial activity through the taxsystem. There are several hypotheses surrounding the degree to which the tax systemactually affects the amount of entrepreneurial activity.First,individuals may be persuaded to undertake risky projects by the fact that smallbusiness owners can much more easily underreport their taxable income than canwage workers.Second, high tax rates make risky projects relatively moreattractive by providing an alternative means of risk sharing that is free fromadverse selection problems.Finally, if the marginal tax rate under thepersonal income tax is an increasing function of taxable income, thenentrepreneurs may owe substantial taxes on any profits. These hypotheses are examined in light of cross-section samples of personalincome tax returns from the U.S. Statistics of Income (1964-1993).Thedata indicate that, contrary to conventional wisdom, cuts in personal tax ratesactually reduce entrepreneurial activity.Tax cuts also imply lessrisk-sharing with the government, making self-employment less attractive towould-be entrepreneurs.Overall, tax policy and macroeconomic policiesplay key roles in generating entrepreneurial activity.For example, ashift to a 20 percent flat tax would triple the self-employmentrate.(SAA)

Keywords: Incentives, Macroeconomics, Taxes, Risk orientation

Suggested Citation

Cullen, Julie Berry and Gordon, Roger H., Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S (2002). NBER Working Paper Series 9015, Vol. , Issue June, 56 pp 2002. Available at SSRN: https://ssrn.com/abstract=1510617

Julie Berry Cullen (Contact Author)

affiliation not provided to SSRN

No Address Available

Roger Gordon

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4828 (Phone)
858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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