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Income Taxes and Entrepreneurs' Use of Labor

Robert Carroll¹; Douglas Holtz-Eakin; Mark Rider²; Harvey S. Rosen³

¹ United States Department of the Treasury · ² Georgia State University · ³ Princeton University

We investigate the effect of entrepreneurs' personal taxes on their use of labor, analyze the tax returns of sole proprietors before and after the Tax Reform Act of 1986, and determine how the substantial reductions in marginal tax rates affected their hiring decisions and wage bills. Individual income taxes exert a statistically and quantitatively significant influence on the probability of hiring workers. Raising the entrepreneur's “tax price” by 10% raises the mean probability of hiring by about 12%. Further, taxes influence total wage payments to workers. The tax‐price elasticity of the median wage bill is about .37.

DOI

10.1086/209961

Volume

18 (2)

Pages

324-351

Language

en

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