Income Taxes and Entrepreneurs' Use of Labor

Posted: 29 Apr 1999

See all articles by Robert Carroll

Robert Carroll

Office of Tax Analysis

Douglas Holtz-Eakin

Syracuse University; National Bureau of Economic Research (NBER)

Mark Rider

Georgia State University - Department of Economics

Harvey S. Rosen

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

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Abstract

This paper investigates the effect of entrepreneurs' personal income tax situations on their use of labor. We analyze the income tax returns of a large number of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates associated with that law affected their decisions to hire labor and the size of their wage bills. We find that individual income taxes exert a statistically and quantitatively significant influence on the probability that an entrepreneur hires workers. Raising the entrepreneur's tax price (one minus the marginal tax rate) by 10 percent raises the mean probability of hiring workers by about 12 percent. Further, conditional on hiring employees, taxes also influence the total wage payments to those workers. The elasticity of the median wage bill with respect to the tax price is about 0.37.

JEL Classification: H24, J23

Suggested Citation

Carroll, Robert and Holtz-Eakin, Douglas and Rider, Mark and Rosen, Harvey S., Income Taxes and Entrepreneurs' Use of Labor. Available at SSRN: https://ssrn.com/abstract=162289

Robert Carroll

Office of Tax Analysis

Main Treasury Building
15th and Pennsylvania Avenue
Washington, DC 20220
United States

Douglas Holtz-Eakin (Contact Author)

Syracuse University ( email )

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Syracuse, NY 13244-2130
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National Bureau of Economic Research (NBER)

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Mark Rider

Georgia State University - Department of Economics ( email )

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United States

Harvey S. Rosen

Princeton University - Department of Economics ( email )

001 Fisher Hall
Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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