An Empirical Model of Tax Convexity and Self-Employment

Jean-Francois Wen and Daniel Gordon ()

The Review of Economics and Statistics, 2014, vol. 96, issue 3, 471-482

Abstract: Do progressive marginal income tax rates discourage self-employment? We assume risk neutrality to construct an implicit surtax on stochastic income relative to steady income, arising from a convex tax schedule. It is computed as part of a structural probit model with earnings equations and a tax simulator. The tax convexity variable and the net-of-tax income difference between self- and paid employment have the predicted signs and high levels of statistical significance for the probability of self-employment. A simulated flat tax reform suggests the tax effects are small. © 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Keywords: tax convexity; marginal income tax rates; self-employment; tax reform (search for similar items in EconPapers)
JEL-codes: C35 H24 J24 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (28)

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