DOES THE FEDERAL INCOME TAX LAW FAVOR ENTREPRENEURS?

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...

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Bibliographic Details
Published in:National tax journal 2020-12, Vol.73 (4), p.1219-1232
Main Author: Toder, Eric
Format: Article
Language:English
Subjects:
Appreciation
Business
Businesspeople
Capital gains
Economic growth
Entrepreneurs
Entrepreneurship
Income distribution
Income tax
Income taxes
Laws, regulations and rules
Self-employed persons
Tax legislation
Tax rates
Taxation
Value
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Summary: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.
ISSN:0028-0283
1944-7477
DOI:10.17310/ntj.2020.4.13