Tax Policy and Entrepreneurial Entry

In this article, the authors focus on impacts of tax rates and, in particular, tax progressivity on the decision to become an 'entrepreneur.' While a proportional tax with a full loss offset will not affect the entry decision for a risk-neutral individual, a progressive schedule with imperfect loss offsets can discourage entry. The authors find substantial evidence for this effect on entrepreneurship using variation in tax schedules faced by households in the Panel Study on Income Dynamics (PSID) over the period from 1979 to 1992. Their empirical results imply a significant increase in entrepreneurial entry when tax rates are less progressive.