Tax Policy and Entrepreneurial Choice: Empirical Evidence from Germany
Final Report Abstract
The factors that induce people to start up or close small entrepreneurial ventures have received increasing attention among academics and politicians alike recently. Governments in Germany and elsewhere have implemented various policies to promote entrepreneurship. Tax policy is frequently suggested to be used as a stimulating instrument. While start-up subsidy programmes are usually targeted at the unemployed, tax policy may additionally provide incentives for dependently employed people to enter self-employment. Government regulations restricting entry into certain occupations and the personal bankruptcy law may also have important effects on entrepreneurship. The central aim of this project was to estimate effects of reforms of the income tax and the government regulation on the selfemployment decision in Germany. We have shown that, empirically, not only preferences of individuals over net returns, but also risk attitudes play a crucial role in entrepreneurial choice, as higher risk associated with income from self-employment may deter risk-averse individuals from choosing this option. Taxation alters both the expected value and the variance of net earnings. The overall effect of taxation on entrepreneurial choice remains unclear as long as the role of risk attitudes has not been clearly understood. Therefore, an important part of this project was devoted to the empirical analysis of the effect of individual risk attitudes on entrepreneurial choice. The main methodological contribution of the project was the development of a structural microeconometric model of entrepreneurial choice in the presence of risk aversion and income uncertainty. The estimated structural model of entrepreneurial choice was also applied for the ex-ante simulations of three hypothetical tax reform scenarios for Germany on transitions into and out of self-employment. Another important methodological contribution was the application of ex-post evaluation methods to policy reforms, such as two tax reforms which reduced marginal tax rates for tradesmen, and reforms of entry regulation and the bankruptcy law.
Publications
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(2009). “Income Taxes and Entrepreneurial Choice: Empirical Evidence from Germany”. Empirical Economics 36/3, 487-513. Preliminary version: DIW Discussion Paper 582 and IZA Discussion Paper 2164
Fossen, Frank M. and Viktor Steiner
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(2009). “Precautionary and Entrepreneurial Saving – New Evidence from German Households”. DIW Discussion Paper 920. SOEPpaper 240. Oxford Bulletin of Economics and Statistics
Fossen, Frank M. and Davud Rostam-Afschar
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(2009). “Would a Flat-Rate Tax Stimulate Entrepreneurship in Germany? A Behavioural Microsimulation Analysis Allowing for Risk”. Fiscal Studies 30/2, 179-218. Preliminary version: DIW Discussion Paper 773
Fossen, Frank M.
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(2010). “The Impact of Risk Attitudes on Entrepreneurial Survival”. Journal of Economic Behavior and Organization 76/1, 45-63. Preliminary version: DIW Discussion Paper 798, IZA Discussion Paper 3525, and SOEPpaper 108
Caliendo, Marco, Alexander S. Kritikos, and Frank M. Fossen
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“The Private Equity Premium Puzzle Revisited: New Evidence on the Role of Heterogeneous Risk Attitudes”. Economica. Preliminary version: DIW Discussion Paper 839 (2008)
Fossen, Frank M.
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“Gender Differences in Entrepreneurial Choice and Risk Aversion: A Decomposition Based on a Microeconometric Model”. Applied Economics. Preliminary version: DIW Discussion Paper 936 (2009)
Fossen, Frank M.
