Federal Tax Policy and Small Business

25 Pages Posted: 26 May 2006 Last revised: 29 Jul 2011

Donald Bruce

University of Tennessee, Knoxville

Tami Gurley-Calvez

University of Kansas Medical Center

Date Written: March 2006

Abstract

Do entrepreneurs need tax reform? This chapter presents a critical evaluation of the desirability of tax incentives for small businesses. We discuss measurement issues in identifying entrepreneurs in publicly-available data and then describe recent trends in several measures gleaned from tax data. Entrepreneurial activity is on the rise as evidenced by a growing share of non-corporate entities among business tax returns. Small businesses represent a disproportional share of taxable profits when compared to their share of total business receipts.

We then turn to a discussion of the current tax treatment of entrepreneurs, followed by a brief overview of recent economic research on entrepreneurial sensitivity to tax policies. Economic theory suggests that taxes can have ambiguous effects on transitions into or out of entrepreneurial activity, which leaves the determination of overall effects to empirical analysis. This leads us to a presentation of our recent analysis of a twelve-year panel of U.S. federal individual income tax returns to examine the effects of federal income and payroll taxes and state income taxes on entrepreneurial activity. Our focus in this new analysis is on the effects of tax rates on individual transitions into or out of some form of entrepreneurial activity.

Suggested Citation

Bruce, Donald and Gurley-Calvez, Tami, Federal Tax Policy and Small Business (March 2006). Hudson Institute Research Paper No. 06-02. Available at SSRN: https://ssrn.com/abstract=904641 or http://dx.doi.org/10.2139/ssrn.904641

Donald James Bruce (Contact Author)

University of Tennessee, Knoxville ( email )

Center for Business and Economic Research (CBER)
1000 Volunteer Blvd., Stokely Management Center 72
Knoxville, TN 37996-4334
United States
(865) 974-5441 (Phone)
(865) 974-3100 (Fax)

HOME PAGE: http://web.utk.edu/~dbruce

Tami Gurley-Calvez

University of Kansas Medical Center ( email )

1415
Jayhawk Blvd.
Lawrence, KS 66045
United States

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