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Taxation and self-employment

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  • Zsófia L. Bárány

Abstract

In this paper I theoretically show that if the self-employed evade income taxes, then the choice of being self-employed is more sensitive to the tax rates on wages than to tax rates on income from self-employment. Using variation in the statutory tax rates across countries, industries, and occupations, I find evidence that supports the predictions of the model. This suggests that those who choose self-employment, partly do so to take advantage of the technology it offers in evading taxes. This extensive margin of adjustment – between employment and self-employment – should be taken into account when considering the effects of tax rates on labor income, on taxable income and on welfare.

Suggested Citation

  • Zsófia L. Bárány, 2017. "Taxation and self-employment," LIS Working papers 723, LIS Cross-National Data Center in Luxembourg.
    • Handle: RePEc:lis:liswps:723
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