Do Tax Rates Encourage Entrepreneurial Activity?

Author/Editor:

Roger H. Gordon

Publication Date:

July 1, 1997

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 1997/088

Subject:

Corporate income tax Financial institutions Labor National accounts Personal income Self-employment Stocks Tax incentives Taxes

Notes:

Also published in Staff Papers, Vol. 45, No. 1, March 1998.

English

Publication Date:

July 1, 1997

ISBN/ISSN:

9781451851120/1018-5941

Stock No:

WPIEA0881997

Pages:

35

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