Do Tax Rates Encourage Entrepreneurial Activity?
IMF Working Papers, July 1, 1997
Source details
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- Do Tax Rates Encourage Entrepreneurial Activity?
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Bibliographic details
- Authors: Roger H. Gordon
- Published: July 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451851120.001
Summary / Main finding
- When the top personal tax rates are above the corporate rate, high-income individuals have an incentive to reclassify their earnings as corporate rather than personal income for tax purposes.
- U.S. tax law imposes strict limits on the extent to which employees in publicly traded corporations can engage in such income shifting.
- Entrepreneurs setting up new firms can more easily reclassify their income for tax purposes, so this tax incentive can favor entrepreneurial activity.
- The paper discusses how best to subsidize entrepreneurial activity while avoiding other economic distortions.
Key analysis points
- Income-shifting incentives depend on the differential between top personal tax rates and the corporate tax rate.
- Legal constraints reduce income shifting for employees in publicly traded corporations but are less effective for entrepreneurs forming new firms.
- Subsidies or tax policy aimed at encouraging entrepreneurship need to account for potential distortions from income reclassification.
Policy discussion and recommendations
- Design subsidies for entrepreneurial activity with attention to:
- Preventing income reclassification that simply converts personal income into corporate income without generating genuine entrepreneurial output.
- Avoiding other economic distortions that can arise from targeted tax incentives.
- Consider legal and administrative measures to limit tax-motivated reclassification where appropriate while preserving incentives for productive entrepreneurship.
Subjects and keywords
- Subject: Corporate income tax, Financial institutions, Labor, National accounts, Personal income, Self-employment, Stocks, Tax incentives, Taxes
- Keywords: compensation offer, copycat firm, Corporate income tax, corporate tax tax rate, entrepreneurial activity, expected return, firm offer equity, mover accent, Personal income, Self-employment, start-up expense, Stocks, Tax incentives, venture capitalist, WP
Roger H. Gordon "Do Tax Rates Encourage Entrepreneurial Activity?", IMF Working Papers 1997, 088 (1997), accessed 8/30/2026, https://doi.org/10.5089/9781451851120.001
Content in this bundle
- Do Tax Rates Encourage Entrepreneurial Activity?-WP/97/88