The Effects of the 1986 and 1993 Tax Reforms on Self-Employment

This paper adds to the recent body of literature that uses individual level data to assess the effects of tax policy on self-employment. Specifically, this study uses repeated cross-section data from the 1983, 1989, 1992, 1995, and 1998 Surveys of Consumer Finances (SCF) against the background of the tax reforms of 1986 and 1993 to gauge the influence of taxes on selfemployment. Following the taxes and labor supply literature, we use the 1986 and 1993 tax reforms as natural experiments that allow us to identify the importance of taxes in the choice to become self-employed. Due to the richness of the SCF data, we are able to control for many of the factors that influence the decision to become self-employed (such as household wealth) and compute marginal and average tax rates using the SCF data and the NBER TAXSIM program. The findings of the paper indicate that marginal and average tax rates are negatively related to the propensity to become self-employed. However, these effects are small in magnitude and only significant for the 1986 tax reforms. Other factors, such as education, industry the individual works in, wealth, and attitude toward risks are more important influences on the choice to become self-employed. *The author would like to thank Robert Avery, Ana Azicorbe, Reagan Baughman, Don Bruce, Chris Carroll, Arthur Kennickell, Robert Moffitt, Nicole Nestoriak, Matt Shum, the participants at the JHU Summer Seminar, and various economists from the Federal Reserve Board for comments on the ideas in this paper. Special thanks go to Dan Feenberg and NBER for allowing the author to use the TAXSIM program. All opinions expressed in this paper are those of the author alone and do not necessarily reflect those of the Board of Governors of the Federal Reserve System. All errors are the responsibility of the author.