The Impact of Tax Incentives on the Economic Activity of Entrepreneurs

Government Institute for Economic Research Working Paper No. 42

54 Pages Posted: 22 Jan 2013

See all articles by Jarkko Harju

Jarkko Harju

Government of the Republic of Finland - VATT Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies

Multiple version iconThere are 3 versions of this paper

Date Written: January 10, 2013

Abstract

Based on existing evidence, we know little about how the taxation of small business owners affects their economic activity. This paper studies the effect of two Finnish tax reforms, in 1997 and 1998, on the effort decisions of the owners of small businesses, utilizing both theoretical model and empirical data. The reforms reduced the income tax rates of small business owners and applied only to unincorporated firms, leaving out corporations. We use a difference-indifferences strategy to estimate the causal impact of tax incentives on the economic activity of small businesses. The results imply that lighter taxation leads to an increase in the turnover of firms that we interpret as an increase in effort exerted by their owners.

Keywords: Entrepreneurs, small businesses, tax incidence

JEL Classification: H22, H24, H25

Suggested Citation

Harju, Jarkko and Kosonen, Tuomas, The Impact of Tax Incentives on the Economic Activity of Entrepreneurs (January 10, 2013). Government Institute for Economic Research Working Paper No. 42, Available at SSRN: https://ssrn.com/abstract=2200912 or http://dx.doi.org/10.2139/ssrn.2200912

Jarkko Harju (Contact Author)

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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