This paper investigates the effect of entrepreneurs' personal income tax situations on the growth rate of their enterprises. We analyze the personal 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 the growth of their firms as measured by gross receipts. We find that individual income taxes exert a statistically and quantitatively significant influence on firm growth rates. Raising the sole proprietor's tax price (one minus the marginal tax rate) by 10 percent increases receipts by about 8.4 percent. This findings is consistent with the view that raising income tax rates discourages the growth of small businesses.
Business economics, models with panel data, startup businesses, new firms, economic development, entrepreneurship, Tax Reform Act of 1986
Working Papers Series
Entrepreneurial and Small Business Operations
Carroll, Robert; Holtz-Eakin, Douglas; Rosen, Harvey S.; and Rider, Mark, "Microdata Panel Data and Public Policy: National and Cross-National Perspectives" (2000). Center for Policy Research. 126.
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