Taxing Entrepreneurial Income

Research Report

Taxing Entrepreneurial Income

January 2, 2017

Abstract

This paper applies the Schumpeterian view of entrepreneurship to estimate the tax rate on entrepreneurial income under alternative assumptions about the pattern of returns from innovations, the tax rules applied to different types of income (wages, interest, capital gains, dividends, corporate profits), and the effects of taxes on the market value of successful enterprises. We model the tax rate on entrepreneurial income as the tax burden on an individual who establishes a new firm and then sells her interest in the business once it becomes an established enterprise. The paper finds the effective tax rate on entrepreneurial income depends on both the tax rate imposed on the entrepreneur’s income during the firm’s growth phase and on the effects of the tax system on the price at which the entrepreneur can cash in her investment when the firm reaches maturity.

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