Abstract
AbstractAnalysis of the relationship between taxes and self-employment should account for the interplay between responses in self-employment and wage employment. To this end, we estimate a two-state multispell duration model which accounts for both observed and unobserved heterogeneity using a large longitudinal administrative data set for Norway for 1993 to 2011. Our findings confirm theoretical predictions and are robust to various changes to definitions and sample selections. A policy experiment simulating a flatter tax schedule in the year 2000 is found to encourage self-employment, delivering a net increase of predicted inflow into self-employment from 2.8% to 5.3%.
Highlights
Numerous studies show that reductions in marginal tax rates increase the labour supply of wage earners, both at the extensive and intensive margin (see for example, Blundell and MaCurdy (1999), and Keane (2011))
The coefficient on netincdiff is positive in the wage employment hazard and negative in the self-employment hazard, whereas we find the opposite for convexity
This paper looks at the effect of taxes on self-employment and wage employment durations
Summary
Numerous studies show that reductions in marginal tax rates increase the labour supply of wage earners, both at the extensive and intensive margin (see for example, Blundell and MaCurdy (1999), and Keane (2011)). By contrast, Wen and Gordon (2014), use a pooled cross-sectional sample from the Canadian Survey of Labour and Income Dynamics over the years 1999-2005 to estimate the probability of self-employment in a probit model.4 They assume risk neutrality and a log-normal distribution for the pre-tax income. Some of the tax effects in both studies are captured via net-income differences, the additional variable convexity in Wen and Gordon (2014) is an individualspecific measure that intuitively captures the interaction between the progressivity of the tax schedule and the volatility of self-employment income relative to wage income.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
