Do Tax Rates Encourage Entrepreneurial Activity?
July 1, 1997
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Summary
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 at least 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. The paper discusses how best to subsidize entrepreneurial activity while avoiding other economic distortions.
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
Pages:
35
Volume:
1997
DOI:
Issue:
088
Series:
Working Paper No. 1997/088
Stock No:
WPIEA0881997
ISBN:
9781451851120
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 45, No. 1, March 1998.
