Do Lower Taxes Stimulate Self-Employment?

This paper investigates the relation between taxation and the share of self-employed in two data sets. First, in a panel of OECD countries a strong negative correlation is found between the tax burden and the share of self-employed in total employment. Unfortunately the OECD data contains a number of measurement problems, and too few observations to allow a reliable detection of reverse causation. Therefore the analysis is complemented with regressions on the relation between the income tax and the share of self-employed using a panel of Swedish counties over the previous two decades. Here again there is a strong negative correlation between the tax burden and the share of self-employment. This survives simultaneous equations estimates and tests of Granger causality. Both samples indicate that reducing the tax burden by 10 percentage points (of GDP) increases the share of self-employed by about 3 percent of total employment.