Tax responsiveness of the self-employed
Kristoffer Berg, OFS Scholarship Recipient 2015
While considerable evidence exists on tax responses for wage earners, less is known about the self-employed. To give insight into the self-employed, literature on tax-induced changes in taxable income, working hours, capital, avoidance and evasion, entry and exit, and organisational form is surveyed. Then, two key responses, the elasticity of taxable income (ETI) and the elasticity of working hours, are measured using information from two data sets, the Income Statistics for Families and Persons and the Labour Force Survey. By applying panel data analysis and difference-in-differences on these data for the period 2001 to 2010 and exploiting the tax variation induced by the 2006 tax reform, I obtain estimates of an ETI between 0.19 and 0.22 and an elasticity of working hours between 0.13 and 0.19. The estimates indicate that the self-employed responded to the tax reform by earning more income and working more hours than they otherwise would have. These responses are larger than corresponding estimates for wage earners in Norway, but imply low efficiency losses from income taxation of the self-employed. The difference between the elasticity of working hours and the ETI indicates that evasion and avoidance are reduced as a result of the tax reform. However, the small magnitude suggests that the self-employed respond more by adjusting working hours than evasion and avoidance.