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Does the Federal Income Tax Law Favor Entrepreneurs?

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  • Eric Toder

Abstract

This paper estimates the effective tax rate on entrepreneurial income, defined as the return to an individual who starts a successful new business and then sells their interest once it becomes an established enterprise. The rate depends on both the tax imposed on the appreciation of the firm’s value during its growth phase and on the effects of the tax system on the value of equity in ongoing business enterprises. Under reasonable assumptions, this rate is lower than the rate the entrepreneur would pay on ordinary income. Preferential taxation of entrepreneurial income has consequences for both economic growth and income distribution.

Suggested Citation

  • Eric Toder, 2020. "Does the Federal Income Tax Law Favor Entrepreneurs?," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(4), pages 1219-1232, December.
    • Handle: RePEc:ntj:journl:v:73:y:2020:i:4:p:1219-1232
    DOI: 10.17310/ntj.2020.4.13
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    Cited by:

    1. Takayuki Nagato, 2024. "Designing a Tax System that Encourages Innovation in Start-ups," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 20(1), pages 1-33, February.

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