Would a Flat Tax Stimulate Entrepreneurship in Germany?: A Behavioural Microsimulation Analysis Allowing for Risk

Frank Fossen

No 773, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: When possible income tax reforms are debated, the suspected impact on entrepreneurship is often used as an argument in favour or against a certain policy. Quantitative ex-ante evaluations of the effect of certain tax reform options on entrepreneurship based on microeconometric research have not been provided by the literature, however. This paper estimates the ex-ante effects of the German tax reform 2000 and of two hypothetical flat tax scenarios on entries into and exits out of self-employment in Germany. For the estimation I apply a microsimulation model which is based on the tax-benefit model STSM and on structural microeconometric models of transitions into and out of self-employment. These structural models include an estimated parameter of risk aversion. The simulation results indicate that flatter tax systems do not encourage, but rather discourage people from choosing self-employment. This is explained by the reduction of entrepreneurs' income risk through progressive taxation.

Keywords: Entrepreneurship; income taxation; risk; tax reform 2000; flat tax (search for similar items in EconPapers)
JEL-codes: D81 H24 J23 L26 (search for similar items in EconPapers)
Pages: 34 p.
Date: 2008
New Economics Papers: this item is included in nep-cmp, nep-ent, nep-pbe and nep-pub
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