Taxes and Entrepreneurial Endurance: Evidence from the Self-Employed

Abstract

Do taxes drive entrepreneurs out of business? This paper uses panel data on self-employed workers to examine whether differential income and payroll taxes affect their decisions to continue operating or to close their doors and take wage-and-salary jobs. I exploit statutory variations in the tax treatment of wage and self-employment income using data from the Panel Study of Income Dynamics. Taking into account the endogeneity of individuallevel tax rates, I find that higher relative marginal tax rates on self-employment income do not necessarily increase the probability of exit.