Income Taxes and Entrepreneur' Use of Labor

Robert Carroll, Douglas Holtz-Eakin, Mark Rider and Harvey Rosen
Additional contact information
Robert Carroll: Ernst & Young
Douglas Holtz-Eakin: Syracuse University
Harvey Rosen: Princeton University

No 752, Working Papers from Princeton University, Department of Economics, Industrial Relations Section.

Abstract: This paper investigates the effect of entrepreneurs' personal income tax situations on their use of labor. We analyze the income tax returns of a large number of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates associated with that law affected their decisions to hire labor and the size of their wage bills. We find that individual income taxes exert a statistically and quantitatively significant influence on the probability that an entrepreneur hires workers. A 6 percentage point reduction in the marginal tax rate of an entrepreneur in the 39.6 percent bracket induces an approximately 1 1.8 percent increase in the probability that he hires labor. Further, conditional on hiring employees, taxes also influence the total wage payments to those workers. The elasticity of the median wage bill with respect to the marginal tax rate is about 0.397.

Keywords: income taxes; entrepreneurs; labor (search for similar items in EconPapers)
JEL-codes: E41 E42 (search for similar items in EconPapers)
Date: 1996-12
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Income Taxes and Entrepreneurs' Use of Labor (2000)
Working Paper: Income Taxes and Entrepreneurs' Use of Labor (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:indrel:373

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