Income Taxes and Entrepreneurial Choice: Empirical Evidence from Germany

Abstract

Does tax policy affect entrepreneurial choice? We use two tax reforms in Germany as "natural experiments". These reforms reduced the marginal income tax rate for entrepreneurs with income above a certain threshold, with the exception of freelance professionals. The two conditions for belonging to the treatment group allow us to apply a "difference-in-difference-in-difference" identification strategy to estimate the effects of the tax rate reductions. We base our analysis on the microcensus, the official representative continuous household survey in Germany. The results indicate that the tax rate reductions increased the probability of choosing self-employment.