Small Business Economics

, Volume 38, Issue 4, pp 495–513 | Cite as

Tax policy and entrepreneurship: empirical evidence from Sweden

  • Åsa Hansson


This paper examines the relationship between income taxes and the decision to become self-employed using data from Sweden. By making it possible to track a large number of individuals over extended time periods and across a number of tax rate changes while controlling for important additional determinants, available tax-return information from Sweden allows for statistical estimation of the influence that income taxes have on the probability of becoming self-employed. The changing tax rate structure combined with the fact that the Swedish tax system does not provide additional tax benefits to small-business entrepreneurs compared with those who work as employees provides a powerful setting through which to examine the tax rate structure’s influence on individuals’ choice to become self-employed. Contrary to many earlier studies based on US data, this paper finds that both average and marginal taxes have a negative impact on the decision to become self-employed.


Firm start-ups Self-employment Tax policy Income taxes 

JEL Classifications

H24 H26 J24 L26 



I am grateful to two anonymous referees for very constructive and insightful comments. I also wish to thank participants at the IIPF meetings in Warwick 2007, and Dan Johansson and Niclas Berggren at Ratio for their helpful suggestions.


  1. Backman, M. (2007). New firm formation and accessibility to financial intermediates. Jonkoping: International Business School.Google Scholar
  2. Blanchflower, D., & Oswald, A. (1998). What makes and entrepreneur? Journal of Labour Economics, 16, 22–60.CrossRefGoogle Scholar
  3. Blanchflower, D., & Shadforth, C. (2007). Entrepreneurship in the UK. IZA Discussion Paper No. 2818.Google Scholar
  4. Blau, D. (1987). A time-series analysis of self-employment in the United States. Journal of Political Economy, 95(3), 445–467.CrossRefGoogle Scholar
  5. Braunerhjelm, P., Svensson, P. & Westin, F. (2003). Akademiskt entreprenörskap—den svaga länken i de svenska innovationssystemen? Ekonomisk Debatt, 35(6).Google Scholar
  6. Briscoe, G., Dainty, A., & Millett, S. (2000). The impact of the tax system on self-employment in the British construction industry. International Journal of Manpower, 21(8), 596–613.CrossRefGoogle Scholar
  7. Bruce, D. (2000). Effects of the United States tax system on transitions into self-employment. Labour Economics, 7, 545–574.CrossRefGoogle Scholar
  8. Bruce, D. (2002). Taxes and entrepreneurial endurance: Evidence from the self-employed. National Tax Journal, 55, 5–24.Google Scholar
  9. Bruce, D., & Mohsin, M. (2006). Tax policy and entrepreneurship: New time series evidence. Small Business Economics, 16, 409–425.CrossRefGoogle Scholar
  10. Cullen, J., & Gordon, R. (2002). Taxes and entrepreneurial activity: Theory and evidence for the US. NBER Working Paper No 9015.Google Scholar
  11. Cullen, J., & Gordon, R. (2006). Hur påverkar skatternas utformning företagande, risktagande och innovationer? En jämförelse mellan USA och Sverige, (How do taxes affect entrepreneurial activity? A comparison of U.S. and Swedish law). In P. Braunerhjelm & J. Wiklund (Eds.), Entreprenörskap och tillväxt: Kunskap, kommersialisering och ekonomisk politik (Entrepreneurship and growth: Knowledge, commercializing, and economic policy). Stockholm, Sweden: Forum For Smaforetagsforskning.Google Scholar
  12. Cullen, J., & Gordon, R. (2007). Taxes and entrepreneurial risk-taking: Theory and evidence for the US. Journal of Public Economics, 91, 1479–1505.CrossRefGoogle Scholar
  13. Davidsson, P., & Henrekson, M. (2002). Determinants of the prevalence of stat-ups and high-growth firms. Small Business Economics, 19, 81–104.CrossRefGoogle Scholar
  14. Domar, E., & Musgrave, R. (1944). Effects of proportional taxes on risk-taking. Quarterly Journal of Economics, 59, 338–422.Google Scholar
  15. Edin, P-A., & Fredriksson, P. (2000). LINDA: Longitudinal Individual Data for Sweden, Department of Economics, Uppsala University Working Paper Series No. 2000:19, Uppsala University, Sweden.Google Scholar
  16. Engström, P., & Holmlund, B. (2009). Tax evasion and self-employment in a high-tax country: Evidence from Sweden. Applied Economics, 41, 2119–2430.CrossRefGoogle Scholar
  17. Evans, D., & Jovanovic, B. (1989). An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy, 97(4), 808–827.CrossRefGoogle Scholar
  18. Evans, D., & Leighton, L. (1989). Some empirical aspects of entrepreneurship. American Economic Review, 79(3), 519–535.Google Scholar
  19. Fairlie, R. W., & Meyer, B. D. (2000). Trends in self-employment among white and black men during the twentieth century. Journal of Human Research, 35, 643–669.CrossRefGoogle Scholar
  20. Fölster, S. (2002). Do lower taxes stimulate self-employment? Small Business Economics, 19, 135–145.CrossRefGoogle Scholar
  21. Fossen, F., & Steiner, V. (2009). Income taxes and entrepreneurial choice: Empirical evidence from two German natural experiments. Empirical Economics, 36, 487–513.CrossRefGoogle Scholar
  22. Gentry, W., & Hubbard, G. (2003). Tax policy and entry into entrepreneurship, mimeograph, Columbia University.Google Scholar
  23. Gentry, W., & Hubbard, G. (2004). “Success taxes”, entrepreneurial entry, and innovation. NBER Working Paper No. 10551, Cambridge.Google Scholar
  24. Giannetti, M., & Simonov, A. (2004). On the determinants of entrepreneurial activity: Social norms, economic environment and individual characteristics. Swedish Economic Policy Review, 11(2), 269–313.Google Scholar
  25. Holtz-Eakin, D., Joulfainan, D., & Rosen, H. (1994). Sticking it our: Entrepreneurial survival and liquidity constraints. Journal of Political Economy, 102(1), 53–75.CrossRefGoogle Scholar
  26. Johansson, E. (2000). Self-employment and liquidity constraints: Evidence from Finland. Scandinavian Journal of Economics, 102(1), 123–134.CrossRefGoogle Scholar
  27. Lindh, T., & Ohlsson, H. (1996). Self-employment and windfall gains: evidence from the Swedish lottery. Economic Journal, 106, 1515–1526.CrossRefGoogle Scholar
  28. Long, J. (1982a). Income taxation and the allocation of market labor. Journal of Labor Research, 3, 259–276.CrossRefGoogle Scholar
  29. Long, J. (1982b). The income tax and self-employment. National Tax Journal, 36, 31–42.Google Scholar
  30. Meyer, B. D. (1990). Why are there so few black entrepreneurs? NBER Working Paper No. 3537.Google Scholar
  31. Moore, R. (1983). Self-employment and the incidence of the payroll tax. National Tax Journal, 36, 491–501.Google Scholar
  32. Moore, R. (2003). The effects of the 1986 and 1993 tax reforms on self-employment. Proceedings of the Ninety-Fifth Annual Conference on Taxation. National Tax Association.Google Scholar
  33. Murphy, K., Shleifer, A., & Vishny, R. (1991). The allocation of talent: Implications for growth. Quarterly Journal of Economics, 106, 503–530.CrossRefGoogle Scholar
  34. Nykvist, J. (2008). Entrepreneurship and liquidity constraints: Evidence from Sweden. Scandinavian Journal of Economics, 110(1), 23–44.CrossRefGoogle Scholar
  35. Nyström, K. (2007). Institutional environment and new firm formation in Swedish regions. Paper presented at the 11th conference for International Society for New Institutional Economics, Reykjavik.Google Scholar
  36. Orme, C. (1997). The initial conditions problem and two-step estimation in discrete panel data models. Manuscript, University of Manchester.Google Scholar
  37. Orme, C. (2001). Two-step inference in dynamic non-linear panel data models. Manuscript, University of Manchester.Google Scholar
  38. Parker, S. C. (1996). A time series model of self-employment under uncertainty. Economica, 63, 459–475.CrossRefGoogle Scholar
  39. Parker, S. C. (2003). Does tax evasion affect occupational choice? Oxford Bulletin of Economics and Statistics, 65(3), 379–394.CrossRefGoogle Scholar
  40. Parker, S. C., & Robson, M. T. (2003). Explaining international variations in entrepreneurship: evidence from a panel of OECD countries. Mimeo, University of Durham.Google Scholar
  41. Persson, A. (2005). Om företagarnas faktiskt redovisade arbetsinkomster och andra indikatorer på deras ekonomiska standard. Skatteekonomiska meddelanden, No. 48, Skatteverket.Google Scholar
  42. Robson, M. T. (1998). The rise in self-employment amongst UK males. Small Business Economics, 65, 757–773.Google Scholar
  43. Robson, M. T., & Wren, C. (1999). Marginal and average tax rates and the incentives for self-employment. Southern Economic Journal, 65(4), 757–773.CrossRefGoogle Scholar
  44. SCB, Statistiska Centralbyrån (Statistical Sweden). (2003). LINDA,
  45. Schuetze, H. (2000). Taxes, economic conditions and recent trends in male self-employment: A Canada-US comparison. Labour Economics, 7, 507–544.CrossRefGoogle Scholar
  46. Schuetze, H., & Bruce, D. (2004). Tax policy and entrepreneurship. Swedish Economic Policy Review, 11, 233–265.Google Scholar
  47. Schumpeter, J. (1934). The theory of economic development. Cambridge, MA: Harvard University Press.Google Scholar
  48. Stabile, M. (2004). Payroll taxes and the decision to be self-employed. International Tax and Public Finance, 11, 31–53.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC. 2010

Authors and Affiliations

  1. 1.Department of EconomicsLund UniversityLundSweden

Personalised recommendations