Tax progressivity and self-employment: evidence from Canadian provinces
self-employment, tax progressivity, occupational choice
We examine the effects of personal income tax progressivity—in the sense of rising marginal income tax rate—on self-employment. The impacts of income tax progressivity on self-employment depend on the relative effects of taxing success and the presence of tax evasion opportunities. Empirical estimates using Canadian provincial data for the period 1979—2006 indicate that there is a negative association between income tax progressivity and self-employment. This suggests that the adverse impact of income tax on entrepreneurial risk-taking outweighs the tax evasion opportunities for the self-employed. An important implication of our results is that a reduction in income tax progressivity encourages self-employment. The empirical estimates are robust to the various sensitivity checks.
Ferede, E. (2013) “Tax Progressivity and Self-employment: Evidence from Canadian Provinces.” Small Business Economics, 40(1):141-153.
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