Income Taxes and Entrepreneurial Choice: Empirical Evidence from Germany

48 Pages Posted: 20 Jun 2006

See all articles by Frank M. Fossen

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Viktor Steiner

Zentrum Fuer Europaeische Wirtschaftsforschung (ZEW) - Center for European Economic Research; IZA Institute of Labor Economics

Date Written: June 2006

Abstract

Entrepreneurial activity is often regarded as an engine for economic growth and job creation. Through tax policy, governments possess a potential lever to influence the decisions of economic agents to start and close small businesses. In Germany, the top marginal income tax rates were reduced exclusively for entrepreneurs in 1994 and 1999-2000. These tax reforms provided two naturally defined control groups that enable us to exploit the legislation changes as natural experiments. First, the tax rate reductions did not apply to freelance professionals (Freiberufler), and second, entrepreneurs with earnings below a certain threshold were not affected. Using data from two different sources, the SOEP and the Mikrozensus (LFS), we analyse the effect of the tax cuts on transitions into and out of self-employment and on the rate of self-employment. We apply a difference-in-difference-indifference estimation technique within a discrete time hazard rate model. The results indicate that the decrease in tax rates did not have a significant effect on the self-employment decision.

Keywords: taxation, entrepreneurship, natural experiment, difference-in-difference-indifference

JEL Classification: H24, H25, J23

Suggested Citation

Fossen, Frank M. and Steiner, Viktor, Income Taxes and Entrepreneurial Choice: Empirical Evidence from Germany (June 2006). IZA Discussion Paper No. 2164, Available at SSRN: https://ssrn.com/abstract=910229 or http://dx.doi.org/10.2139/ssrn.910229

Frank M. Fossen

University of Nevada, Reno ( email )

1664 N. Virginia Street
Reno, NV 89557-0030
United States

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

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=2906

Viktor Steiner (Contact Author)

Zentrum Fuer Europaeische Wirtschaftsforschung (ZEW) - Center for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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