Lower Marginal Tax Rates Increase Entrepreneurship

Lower Marginal Tax Rates Increase Entrepreneurship: The study, Taxes and Entrepreneurial Activity: An Empirical Investigation Using Longitudinal Tax Return Data released by the Office of Advocacy of the SBA discovered that reducing marginal income tax rates on entrepreneurs increases entrepreneurial entry, decreases exit from entrepreneurship, and lengthens the duration of entrepreneurial ventures.

Tax Rates Directly Affect Entrepreneurial
Entry, Duration, And Exit

Reducing marginal income tax rates on entrepreneurs increases entrepreneurial entry, decreases exit from entrepreneurship, and lengthens the duration of entrepreneurial ventures, according to a study (http://www.sba.gov/advo/research/rs252tot.pdf)
released today by the Office of Advocacy of the U.S. Small Business Administration.

“This study shows how tax rates directly impact entrepreneurship,” said Thomas M. Sullivan, Chief Counsel for Advocacy. “Reducing marginal tax rates on entrepreneurial income provides a clear incentive for entrepreneurial activity. Policy makers who understand the importance of increasing entrepreneurship and economic growth should use this study to guide their policy decisions.”

The study, Taxes and Entrepreneurial Activity: An Empirical Investigation Using Longitudinal Tax Return Data written by Donald Bruce and Tami Gurley with funding from the Office of Advocacy, offers several specific findings including:

* A marginal tax rate reduction of one percent on entrepreneurial income increases the probability of entrepreneurial entry by 1.42 percent for single filers and 2.0 percent for married filers.

* A marginal tax rate reduction of one percent on entrepreneurial income decreased the probability of exiting entrepreneurial activity by 17.32 percent for single filers and by 7.81 percent for married filers.

* A marginal tax rate reduction of one percent on entrepreneurial income lengthens the duration of entrepreneurial activity by 32.5 percent for single filers and 44.8 percent for married filers.

* Higher marginal tax rates on wage-and-salary income also increase entrepreneurial activity as they provide incentives for workers to start their own businesses.



The study was released at a panel discussion entitled “Tax Policy and the Entrepreneurial Sector,” sponsored by the Small Business & Entrepreneurship Council. It analyses tax return data from 1979-1990. This period encompasses the tax policy changes of the 1980s, which allowed the authors to closely examine the effects of tax rate changes on entrepreneurship.

The Office of Advocacy, the “small business watchdog” of the government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small business statistics presented in user-friendly formats and it funds research into small business issues. For more information and a copy of the report, visit www.sba.gov/advo.

 
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