The Wealth Tax and Entrepreneurial Activity

Abstract

Entrepreneurship is often credited with generating important positive economic externalities, such as promoting innovation, discovering new markets and serving as a mechanism for knowledge spill-over. Governments increasingly view encouragement of entrepreneurship as an important policy objective. Economists have found taxation as an important determinant of entrepreneurship, particularly income tax and capital gains tax. One form of taxation that has not been considered so far is the wealth tax. The wealth tax is likely to influence entrepreneurship negatively by affecting the pool of capital available for start-up businesses as well as reducing the net return to successful entrepreneurs. This article illustrates the impact of wealth tax on entrepreneurship using a simple model of the choice between becoming an entrepreneur or an employee. Actual data are then used to investigate whether the wealth tax indeed has a measurable effect on self-employment in Organisation for Economic Cooperation and Development (OECD) countries. A differences-indifferences type estimator using the abolition of the wealth tax as a ‘natural experiment’ points to a consistent pattern of perceptible, but small impact.