Employment to self-employment transitions in response to differential taxation

Tom Zawisza (jointly with Justyna Klejdysz from LMU)

“We study the impact of a large tax cut for unincorporated business owners in Poland on high-income individuals' decision to transition from employment to unincorporated self-employment. The marginal tax rate for the highest-income business owners decreased from 40\% to a flat rate of 19% in 2004, while the highest-income employees remained subject to a progressive tax schedule with a top rate of 40%. We find a 26% increase in the probability of high-income employees switching to self-employment five years after the reform. Among those who made the transition, we observe a rise in the proportion of long-term solo self-employed individuals. The entries from employment to self-employment temporarily decreased after the reform of the progressive schedule in 2009 that lowered the tax differential; however, we do not observe the returns into employment of those who previously switched to self-employment. These findings suggest that large tax differentials increased the attractiveness of self-employment as an alternative to employment but did not necessarily increase entrepreneurship among those who switched to self-employment.”

About the speaker:

Tom Zawisza’s research focuses on analyzing the insurance and incentive effects of tax and welfare policy. He looks at this problem from two perspectives: a theoretical one, where I model individuals as forward-looking agents making optimal saving and labour-supply choices; and an empirical one, where I attempt to identify structural parameters of models from the data.