Dean Glenn Hubbard talks about why progressive tax rates tend to deter new entrepreneurs and how far governments should go to create a favorable environment for entrepreneurship.
In your paper with Bill Gentry, you found that a progressive tax rate has a negative effect on entrepreneurial entry. Could you briefly summarize your findings?
A lot of times, when people think about the way tax policy affects behavior, they focus on whether taxes discourage work. So, if you have a high tax rate, you’re less likely to work hard. The problem is, it’s not always easy to find that in the data. Most people who are very talented work very hard whether the tax rate is high or low. Bill and I wanted to look at entrepreneurship because it struck us that entrepreneurship is about taking a lot of risk. And so if you have a tax code that says, “If you take a risk and you’re successful, we tax you at a high rate; if you take a risk and you fail, we don’t share that loss with you,” you’ve changed the bet, and that might discourage entrepreneurship.
We found, using data on a number of tax reforms in the 1970s, 1980s and 1990s, that indeed that was the case. When you had a more progressive tax code, you wound up discouraging people from entering entrepreneurship, holding constant other characteristics of the person — how much money they have, what industry they’re in, and so on.
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