Taxes and Entrepreneurial Activity: An Empirical Investigation Using Longitudinal Tax Return Data

The study was written by Donald Bruce and Tami Gurley with funding from the Office of Advocacy, and offers several specific findings including:

• A marginal tax rate reduction of one percent on entrepreneurial income increases the probability of entrepreneurial entry by 1.42 percent for single filers and 2.0 percent for married filers.

• A marginal tax rate reduction of one percent on entrepreneurial income decreased the probability of exiting entrepreneurial activity by 17.32 percent for single filers and by 7.81 percent for married filers.

• A marginal tax rate reduction of one percent on entrepreneurial income lengthens the duration of entrepreneurial activity by 32.5 percent for single filers and 44.8 percent for married filers.

• Higher marginal tax rates on wage-and-salary income also increase entrepreneurial activity as they provide incentives for workers to start their own businesses.

The study was released at a panel discussion entitled "Tax Policy and the Entrepreneurial Sector," sponsored by the Small Business & Entrepreneurship Council. It analyses tax return data from 1979-1990. This period encompasses the tax policy changes of the 1980s, which allowed the authors to closely examine the effects of tax rate changes on entrepreneurship.

A full copy of the study can be obtained at: http://www.sba.gov/advo/research/rs252tot.pdf, and the research summary is located at http://www.sba.gov/advo/research/rs252.pdf.