Income taxation, entrepreneurship, and incorporation status of self-employment

This paper splits self-employment, which has mostly been used as a proxy for entrepreneurship, into two different entrepreneur types with incorporated and unincorporated businesses. I examine how these two types differ in sensitivity to individual-specific marginal and average personal income tax rates in the USA. I analyze the probability of becoming an incorporated or unincorporated self-employed worker by utilizing IV models. I use the Annual Social and Economic rotating panel data of the Current Population Survey from 2005 to 2019 to track a paid employee's decision to become self-employed. My empirical findings show that reducing personal income tax rates increases overall self-employment activity. Higher personal income tax rates encourage incorporated entrepreneurship but discourage unincorporated entrepreneurship. These results imply that future research and tax policy should take into account that different types of entrepreneurs respond differently to tax incentives.