Personal Income Taxes and the Growth of Small Firms

Posted: 24 Nov 2009

See all articles by Harvey S. Rosen

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Robert Carroll

affiliation not provided to SSRN

Douglas Holtz-Eakin

affiliation not provided to SSRN

Mark Rider

Georgia State University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: 2000

Abstract

Very little is known about the relationship betweentax rates and business growth. The central question is whether firms with largedecreases in tax rates grow faster than those without those decreases. A studyof 31,034 tax returns from the Statistics of Income Individual Tax Files for1985 and 1988 was undertaken to determine the impact of the Tax Reform Act of1986 on the growth of sole proprietors' enterprises. The act, which involvedsignificant reductions in marginal tax rates, appears to have quickened ratesof firm growth. The elasticity of receipts with respect to the tax price (oneminus the marginal tax rate) is about 0.84. This implies that decreasing a soleproprietor's tax rate from 50 to 33 percent would lead to an increase in his orher receipts by about 28 percent. While it is important to recognize that notall entrepreneurs are sole proprietors, the fact remains that raising incometaxes slows the growth of small businesses, particularly soleproprietorships.(SAA)

Keywords: IRS Statistics of Income Individual Tax Files, Tax Reform Act of 1986, Firm growth, Income taxes, Sole proprietorships, Income tax returns

Suggested Citation

Rosen, Harvey S. and Carroll, Robert and Holtz-Eakin, Douglas and Rider, Mark, Personal Income Taxes and the Growth of Small Firms (2000). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1510599

Harvey S. Rosen (Contact Author)

Princeton University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Robert Carroll

affiliation not provided to SSRN

Douglas Holtz-Eakin

affiliation not provided to SSRN

Mark Rider

Georgia State University - Department of Economics ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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