35 Pages Posted: 11 Nov 2003
Date Written: October 2000
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.
Suggested Citation: Suggested Citation
Carroll, Robert and Holtz-Eakin, Douglas and Rider, Mark and Rosen, Harvey S., Personal Income Taxes and the Growth of Small Firms (October 2000). NBER Working Paper No. w7980. Available at SSRN: https://ssrn.com/abstract=246882
By David Evans
By Simon Parker