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Marginal and average tax rates and the incentive for self-employment

Lookup NU author(s): Dr Martin Robson, Professor Colin Wren

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Abstract

The paper examines how the incentives for individuals to take up self-employment, rather than paid employment, are influenced by the marginal and average income tax rate. A model is developed in which an individual optimally chooses the supply of labor effort and the amount of tax to evade. Assuming that remuneration is more responsive to effort but that the opportunities for evasion are greater in self-employment, we find a negative relationship between self-employment and the marginal tax rate but a positive relationship with the average rate. This is supported by empirical evidence for 15 OECD countries over the 1980s.

Publication metadata

Author(s): Robson MT, Wren C

Publication type: Article

Publication status: Published

Journal: Southern Economic Journal

Year: 1999

Volume: 65

Issue: 4

Pages: 757-773

Print publication date: 01/04/1999

ISSN (print): 0038-4038

ISSN (electronic):

Publisher: Southern Economic Association

URL: http://dx.doi.org/10.2307/1061274

DOI: 10.2307/1061274

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