The impact of tax incentives on the economic activity of entrepreneurs

Tuomas Kosonen and Jarkko Harju

No 42, Working Papers from VATT Institute for Economic Research

Abstract: Based on existing evidence, we know little about how the taxation of small business owners affects their economic activity. This paper studies the effect of two Finnish tax reforms, in 1997 and 1998, on the effort decisions of the owners of small businesses, utilizing both theoretical model and empirical data. The reforms reduced the income tax rates of small business owners and applied only to unincorporated firms, leaving out corporations. We use a difference-indifferences strategy to estimate the causal impact of tax incentives on the economic activity of small businesses. The results imply that lighter taxation leads to an increase in the turnover of firms that we interpret as an increase in effort exerted by their owners.

Keywords: Entrepreneurs, small businesses, tax incidence, Labour market, Työmarkkinat, Taxation, Verotus, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, H220 - Taxation and Subsidies: Incidence, H240 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes, H250 - Business Taxes and Subsidies including sales and value-added (VAT), (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-acc, nep-ent, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://www.doria.fi/handle/10024/148780

Related works:
Working Paper: The Impact of Tax Incentives on the Economic Activity of Entrepreneurs (2013)
Working Paper: The Impact of Tax Incentives on the Economic Activity of Entrepreneurs (2012)
Working Paper: The Impact of Tax Incentives on the Economic Activity of Entrepreneurs (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fer:wpaper:42

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