The Impact of Tax Incentives on the Economic Activity of Entrepreneurs

43 Pages Posted: 11 Jun 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: May 31, 2013

Abstract

This paper studies the effect of Finnish tax reforms in the mid 1990s on the economic activity and tax avoidance decisions of the owners of small businesses. The reforms reduced income tax rates and increased tax planning incentives for small business owners. They applied only to unincorporated firms. We utilize both a theoretical model and empirical data. The empirical strategy is to use the reforms as a natural experiment to estimate the causal impact of the reforms. The results imply that entrepreneurs react to tax incentives along both real and avoidance margins, while the latter elasticity is larger.

Keywords: entrepreneurs, small businesses, tax incidence

JEL Classification: H250, H240, H220

Suggested Citation

Harju, Jarkko and Kosonen, Tuomas, The Impact of Tax Incentives on the Economic Activity of Entrepreneurs (May 31, 2013). CESifo Working Paper Series No. 4259, Available at SSRN: https://ssrn.com/abstract=2277419

Jarkko Harju

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 (Contact Author)

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

P.O. Box 54
FIN-00014 Helsinki
Finland

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