Tax Policy and Entrepreneurship - University of Victoria

We begin in Section 1 with a survey of the theoretical literature. In this section weexamine the various facets of tax policy which have been identified by economic theory asinfluential in the self-employment decision as well as their likely impacts. Section 2 provides adiscussion of the empirical literature related to the impacts of tax policy on self-employment.Section 3 highlights a number of issues identified in the literature relating to self-employmentand tax non-compliance. A discussion of conclusions, policy implications, and areas for futureresearch closes the paper in Section 4.Before we begin, however, it is important to define entrepreneurship and distinguishbetween what is meant by “entrepreneurship” and “self-employment”. Despite its importance,entrepreneurship is an elusive concept. Many definitions typically refer to the creation of a new,usually small, business. The emphasis appears to be on individuals who are enterprising orinnovative in their approach and who assume some degree of risk in their business venture. It isclear from the discussion above that these are some of the attributes that policy-makers seek outwhen advocating entrepreneurship. However, measuring such activity can be difficult. In mostof the empirical studies reviewed in this paper the measure used is the number of individualswho report working for themselves, which matches quite closely the “self-employed”classification. This measure includes individuals engaged in widely varying activities, includingthose who operate chain stores, as an example. Chain store operators may encounter somedegree of risk but we might not think of these workers as innovative if they are following astylized approach common across all establishments in the chain. For this and other reasons, thismeasure may overstate the amount of entrepreneurial activity. On the other hand, this measureleaves out individuals engaged in enterprising or innovative behavior in more established firms.Both the theoretical literature, which emphasizes risk and leaves out innovation, and the3