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Would a Flat Tax Stimulate Entrepreneurship in Germany? A Behavioural Microsimulation Analysis Allowing for Risk

Discussion Papers 773, 34 S.

Frank M. Fossen

2008. April.

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Published in: Fiscal Studies 30 (2009) No.2, 179-218


When possible income tax reforms are debated, the suspected impact on entrepreneurship is often used as an argument in favour or against a certain policy. Quantitative ex-ante evaluations of the effect of certain tax reform options on entrepreneurship based on microeconometric research have not been provided by the literature, however. This paper estimates the ex-ante effects of the German tax reform 2000 and of two hypothetical flat tax scenarios on entries into and exits out of self-employment in Germany. For the estimation I apply a microsimulation model which is based on the tax-benefit model STSM and on structural microeconometric models of transitions into and out of self-employment. These structural models include an estimated parameter of risk aversion. The simulation results indicate that flatter tax systems do not encourage, but rather discourage people from choosing self-employment. This is explained by the reduction of entrepreneurs' income risk through progressive taxation.

Topics: Firms, Taxes

JEL-Classification: H24;J23;L26;D81
Keywords: Entrepreneurship, income taxation, risk, tax reform 2000, flat tax
Frei zugängliche Version: (econstor)