Income Taxes and Entrepreneurial Choice: Empirical Evidence from Germany

In Germany, the top marginal income tax rates were reduced exclusively for entrepreneurs in 1994 and 1999-00. Using data from two different sources, the SOEP and the Mikrozensus (LFS), the authors analyse the effect of the tax cuts on transitions into and out of self-employment and on the rate of self-employment. The results indicate that the decrease in tax rates did not have a significant effect on the self-employment decision.