Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 1999:17: Taxation of Small Firms under Uncertainty - A Real Option View of Firm Creation

Tomas Forsfält
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Tomas Forsfält: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: This paper addresses the impact of the tax system on the incentives to become self-employed. The new approach here is that the creation of a firm is assumed to be an opportunity but not an obligation, that is, a real option. A comprehensive income tax system and a "dual" tax system of the Nordic type are compared. The comprehensive system Yields a higher threshold with respect to creating a firm than the dual system. Swedish data on disposable income for different socio-economic groups are used to evaluate the relevance of the critical assumptions in the model and to find parameter estimates. A result is that the assumptions are consistent with data for white-collar labor but not for blue-collar labor.

Keywords: income tax; firm creation; occupational choice; real option

JEL-codes: D81; H24; J24

33 pages, November 1, 1999

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