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Journal Article

Does the Federal Income Tax Law Favor Entrepreneurs?

Eric Toder
July 20, 2021
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Abstract

This paper estimates the effective tax rate on entrepreneurial income, defined as the return to an individual who starts a successful new business and then sells their interest once it becomes an established enterprise. The rate depends on both the tax imposed on the appreciation of the firm’s value during its growth phase and on the effects of the tax system on the value of equity in ongoing business enterprises. Under reasonable assumptions, this rate is lower than the rate the entrepreneur would pay on ordinary income. Preferential taxation of entrepreneurial income has consequences for both economic growth and income distribution.

This paper was originally published by the National Tax Journal in December of 2020.

Research Area

Business Taxes
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Meet the Experts

  • Eric Toder
    Institute Fellow and Codirector, Tax Policy Center
Research report

New Evidence on The Effect of The TCJA On the Housing Market

Robert McClelland, Livia Mucciolo, Safia Sayed
March 30, 2022
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