Tax Reform and Entrepreneurial Activity

Abstract

The objective of this paper is to forecast the effects of plausible tax reforms on the extent of entrepreneurial activity in the United States. To do so, we draw on recent work we have done assessing the many routes through which the tax structure affects the amount of entrepreneurial activity, and estimating the responsiveness of behavior to these incentives. Using these estimates, we forecast that the effect of tax reforms on entrepreneurial activity can be very sensitive to whether or not current tax provisions aimed to encourage risk-taking in small firms remain part of the tax code. If they are left in place, we forecast that a shift to a Hall-Rabushka flat tax will leave the overall amount of entrepreneurial activity largely unaffected, although it will lead to a drop in activity among the highly skilled and an offsetting increase in activity among the less highly skilled. However, if in the process of fundamental tax reform, net operating loss carrybacks are disallowed, and section 1244 allowing ...