Transitions between Employment and Self-Employment in Response to Differential Taxation

Justyna Klejdysz () and Tom Zawisza ()
Additional contact information
Justyna Klejdysz: LMU Munich and ifo Institute
Tom Zawisza: OECD and Institute for Fiscal Studies

No 43, MF Working Papers from Ministry of Finance in Poland

Abstract: How does the differential tax treatment of employees versus self-employed affect the decision to switch to self-employment? Using administrative data on the universe of taxpayers, we study the impact of a large tax cut for business owners in Poland on high-income individuals’ decisions to transition from employment to self-employment. In 2004, the marginal tax rate for business owners in the top income bracket decreased from 40% to a flat rate of 19%, while employees remained subject to a progressive tax schedule with a top rate of 40%. We find a 17% increase in the probability of high-income employees switching to self-employment five years after the reform. The increase in entries to self-employment was driven by increased transitions to long-term solo self-employment (self-employment without dependent workers), especially in high-skilled service industries. In 2009, another reform reduced the tax differential. The entries from employment to self-employment temporarily decreased, but those who had previously switched to self-employment did not return to employment. These findings suggest that large tax differentials increased the attractiveness of self-employment as an alternative to employment but also increased the share of entrants to self-employment who do not hire workers.

Keywords: employment; self-employment; optimal taxation; income tax; highincome earners (search for similar items in EconPapers)
JEL-codes: D31 H20 J62 L26 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2024-08-16, Revised 2024-08-16
New Economics Papers: this item is included in nep-ent, nep-iue, nep-lab, nep-pbe, nep-pub and nep-tra
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.gov.pl/web/finance/no-43-2024-j-klejdy ... ifferential-taxation Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:mfplwp:0043

Access Statistics for this paper

More papers in MF Working Papers from Ministry of Finance in Poland Contact information at EDIRC.
Bibliographic data for series maintained by Ministry of Finance in Poland ().