An Empirical Model of Tax Convexity and Self-Employment
We extend the theoretical model of Rees and Shah (1986) to incorporate the effects of marginal tax rate progression and income transfers, as arguments in the individual's utility choice model between self-employment and paid- employment. Measures of the degree of progressivity in the tax and transfer system are constructed from the concept of tax convexity (Gentry and Hubbard, 2000, 2004). The earnings equations are corrected for self-selection bias and are combined with the Canadian Tax and Credit Simulator (Milligan, 2007) to calculate tax both the predicted net-of-tax earnings and the tax convexity variables in the self-employment/employed labor choice decision. The model is estimated using data spanning 1999-2005 from Statistics Canada's Survey of Labour and Income Dynamics. The principal Â…findings are that the tax convexity variables and the net income difference between self- and paid-employment have the predicted signs and high levels of statistical signfiÂ…cance in the structural probit model. We use the model to estimate the effects of federal tax rate reductions in 2001 on the rate of self-employment in Canada.
Year of publication: |
2010-01-17
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Authors: | Wen, Jean-Francois ; Gordon, Daniel V. |
Institutions: | Department of Economics, University of Calgary |
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