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

Referierte Aufsätze Web of Science

Frank M. Fossen

In: Fiscal Studies 30 (2009), 2, S. 179-218


When potential income tax reforms are debated, the suspected impact on entrepreneurship is often used as an argument in favour of or against a certain policy. Quantitative ex-ante evaluations of the effect of certain tax reform options on entrepreneurship are very rare, however. This paper estimates the ex-ante effects of the German tax reform 2000 and of two hypothetical flat-rate tax scenarios on entries into and exits out of self-employment based on a structural microsimulation model with econometrically estimated transition rates under risk. The simulation results indicate that flatter tax systems do not encourage people to choose self-employment, but rather discourage them from doing so. This is explained by the reduction of entrepreneurs' income risk through progressive taxation.

Topics: Taxes

JEL-Classification: H24;J23;L26;D81
Keywords: Entrepreneurship, Income Taxation, Risk, German Tax Reform 2000, Flat Tax