Small Business Economics

, Volume 40, Issue 1, pp 141–153

Tax progressivity and self-employment: evidence from Canadian provinces

Authors

    • Department of EconomicsGrant MacEwan University
Article

DOI: 10.1007/s11187-011-9350-7

Cite this article as:
Ferede, E. Small Bus Econ (2013) 40: 141. doi:10.1007/s11187-011-9350-7

Abstract

We examine the effects of personal income tax progressivity—in the sense of rising marginal income tax rate—on self-employment. The impacts of income tax progressivity on self-employment depend on the relative effects of taxing success and the presence of tax evasion opportunities. Empirical estimates using Canadian provincial data for the period 1979–2006 indicate that there is a negative association between income tax progressivity and self-employment. This suggests that the adverse impact of income tax on entrepreneurial risk-taking outweighs the tax evasion opportunities for the self-employed. An important implication of our results is that a reduction in income tax progressivity encourages self-employment. The empirical estimates are robust to the various sensitivity checks.

Keywords

Self-employment Tax progressivity Occupational choice

JEL Classifications

H24 J23 J24 L26

Supplementary material

11187_2011_9350_MOESM1_ESM.doc (58 kb)
Supplementary material 1 (DOC 57 kb)

Copyright information

© Springer Science+Business Media, LLC. 2011