Cross-country differences in self-employment rates: A panel data study on the relation between entrepreneurship, taxes and institutions within the OECD.

Abstract: This essay provides an analysis of the relation between entrepreneurship, taxes and institutions. Based on endogenous growth theory, the entrepreneur, as a provider of innovations, is expected to have an essential impact on economic growth. For the modern welfare state this raises the question on how to optimally tax entrepreneurial activity in order to minimize distortion effects, while stimulating growth. The most widely used proxy for entrepreneurship in the tax literature is self-employment. However, a large part of the empirical literature is based on single country analysis and fewer studies have been concerned with longitudinal cross-country comparisons. Using a relatively novel data set on harmonized self-employment rates, this thesis aims at contributing to the literature by further investigating the channels by which taxes affects self-employment in order to explain the large cross-country variations in self-employment over time in OECD countries. Moreover, this study analyses, both theoretically and empirically, the joint effect of tax policies and institutional quality on self-employment, two aspects that the economic literature previously has investigated, though mostly in isolation. The effect of taxes is estimated using a panel data set on 17 OECD countries between 1982 and 2008, using data on personal income taxes and corporate income taxes. The main contribution of the study is the use of a relatively new harmonized measure of self-employment, the use of both personal and corporate income taxes in an aggregated cross-country setting as well as the inclusion of several measures of institutional quality. The results indicate that corporate income tax is the only tax that seems to have a significantly robust negative effect on self-employment, even though the effect is very small. The results also suggest that opposing effects of taxes may be explained by the degree of corruption in a country. In general, regulation of business, labour and credit seems to have a larger impact on self-employment relative to taxes.