Income Taxes and Entrepreneurs' Use of Labor

Author(s)/Creator(s)

Robert Carroll, Syracuse University
Douglas Holtz-Eakin, Syracuse University
Mark Rider
Harvey Rosen, Syracuse University

Description/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. Raising the entrepreneur’s “tax price” (one minus the marginal tax rate) by 10 percent raises the mean probability of hiring workers by about 12 percent. 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 tax price is about 0.37.

Document Type

Working Paper

Date

7-1998

Series

Metropolitan Studies Program Series

Acknowledgements

We thank Esther Gray, Mary Santy, Ann Wicks, and Jodi Woodson for their aid in preparing the manuscript. We are grateful to Jason Cummins, Martin Feldstein, William Gale, William Gentry, Daniel Hamermesh, Bo Honoré, David Joulfaian, Leslie Papke, Yoram Weiss, two referees, and seminar participants at Baruch College, Boston College, Brigham Young University, George Mason University, The National Bureau of Economic Research, Princeton University, Syracuse University, the University of California at Santa Barbara, the University of Kentucky, the University of Maryland, and Vassar College for useful comments on an earlier draft.

Disciplines

Economic Policy | Economics | Public Affairs, Public Policy and Public Administration | Public Policy

ISSN

0732 507X

Additional Information

Metropolitan studies program series occasional paper no.193

Recommended Citation

Carroll, Robert; Holtz-Eakin, Douglas; Rider, Mark; and Rosen, Harvey, "Income Taxes and Entrepreneurs' Use of Labor" (1998). Center for Policy Research. 440.
https://surface.syr.edu/cpr/440

Source

Local Input

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.