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IMF
Staff Papers Logo    March 1998
Volume 45, Number 1
 
Can High Personal Tax Rates Encourage Entrepreneurial Activity?
By Roger Gordon

Full Text of This Article (PDF 2,168 K)

Abstract: 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. At least U.S. tax law imposes strict limits on the extent to which employees in publicly traded corporations can engage in such income shifting. However, entrepreneurs setting up new firms can easily reclassify their income for tax purposes. This tax incentive therefore favors entrepreneurial activity. In the United States, these tax incentives were huge during the 1950s and 1960s, though they have been much smaller since then. [JEL H25,O31,L11]

1998 International Monetary Fund