March 16, 2005 10:23 AM CST

Taxes and Entrepreneurial Activity: An Empirical Investigation Using Longitudinal Tax Return Data

By United States Small Business Administration

The study, Taxes and Entrepreneurial Activity: An Empirical Investigation Using Longitudinal Tax Return Data released by the Office of Advocacy of the U.S. Small Business Administration discovered that reducing marginal income tax rates on entrepreneurs increases entrepreneurial entry, decreases exit from entrepreneurship, and lengthens the duration of entrepreneurial ventures.

The study was written by Donald Bruce and Tami Gurley with funding from the Office of Advocacy, and 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.

A full copy of the study can be obtained at: http://www.sba.gov/advo/research/rs252tot.pdf, and the research summary is located at http://www.sba.gov/advo/research/rs252.pdf.

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About the Author

Since its inception nearly sixty years ago, the U.S. Small Business Administration (SBA) has helped millions of small business owners by providing the financial support, contracts, counseling and other forms of assistance they need to succeed. Visit www.sba.gov to learn more.