Entrepreneurship and Tax Policy

Abstract

This paper analyzes the impacts of tax changes on entrepreneurial activity. The analysis is focused on the U.S. personal income and capital gains tax reforms of 2001 and 2003 respectively. For this study a panel data set is constructed from several government agencies. The data is assessed using a time-series model with controls for macroeconomic and industry specific conditions as well factors approximating to capital availability. I find that for the 1998-2009 period there is a statistical, negative correlation between both the personal income tax rate and the capital gains tax rate and entrepreneurship as measured by the number of non-farm sole proprietorships (NFSP) tax returns as a percent of the labor force population across major U.S. industry categories. These findings are contrary to Georgellis and Wall (2002) that personal income tax rates above 35% increase entrepreneurship, but support the conclusions of both Wu (2005) and Bruce (2006) that tax increases negatively impact entrepreneurship. This paper finds that lower taxes at either the personal income or capital gains level encourage entrepreneurship.