Today, HuffPo ran my contribution to the Kauffman series, and given the mid-April timeframe, what better topic than tax reform?
[T]he taxes entrepreneurs fear most are not corporate, since many startups these days are sole proprietorships or Limited Liability Companies (LLCs). They pay individual taxes, the good old 1040, not corporate taxes. More often than not, they're paying the top marginal rate.
The theory is that when the top marginal tax rate goes up, entrepreneurship goes down. In 2000, Glenn Hubbard and Bill Gentry examined tax records and found that higher progressivity lowers the probability of an individual choosing entrepreneurship over corporate employment. A year later, Bob Carroll and co-authors found that entrepreneurial profits were lower in states with higher marginal tax rates.
Over the last couple of years, I've been conducting economic experiments to see if progressive taxes affected entrepreneurial behavior, and early (unpublished) results confirm the empirical studies, with a surprising twist: Making taxes more progressive (that is, raising tax rates on the rich while lowering them for everyone else) lowers the incentive for people to take risks that might make them rich. But the surprise was that higher flat-rate taxes had no effect on entrepreneurial behavior.
Read the whole thing here.