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Income tax and older American workers’ job transition into self-employment (Choi 2012)

Absence of conflict of interest.

Citation

Choi, S. (2012). Income tax and older American workers’ job transition into self-employment. Korea and the World Economy, 13(2), 189-214.

Highlights

  • The study examined the effect of a progressive income tax on the likelihood of transitioning to self-employment among older workers.
  • The study used a nonexperimental approach (the exponential hazard model) that compared the likelihood of transitioning from a wage job to self-employment based on the marginal taxes a worker would expect to pay. The author used the data from the Health and Retirement Study in 1992 matched to the Social Security Administration Master Earnings File from 1980 to 1991, which contains W-2 records of earnings from both wage work and self-employment.
  • The study found that a more progressive tax (that is, a tax schedule that increases sharply toward the higher end) or higher marginal tax rates reduces the likelihood of entering self-employment.
  • The quality of causal evidence presented in this report is low because the author did not ensure that the groups with higher or lower marginal tax rates were similar before a change in the tax schedule. This means we are not confident that the estimated effects are attributable to changes in marginal taxes; other factors are likely to have contributed.

Intervention Examined

Progressive Income Tax

Features of the Study

The study used a statistical model (the exponential hazard model) to examine how changes in marginal tax rates impact the likelihood that workers transition to self-employment from wage work. The author matched wage records from 1980 to 1991 to the 1992 Health and Retirement Study. The study examined outcomes over the 11-year period for the 12,651 workers who were ages 31 and older in 1980.

Findings

Employment

  • The author found a more progressive tax (that is, a tax schedule that increases sharply toward the higher income end) or a higher marginal tax rate reduces the likelihood of entering self-employment among older workers.

Considerations for Interpreting the Findings

The author did not account for other factors that could have affected the difference in employment outcomes between workers with higher or lower marginal tax rates. The study does not control for year, economic conditions, or occupation, nor does it account for wages more than one year before the transition.

Causal Evidence Rating

The quality of causal evidence presented in this report is low because the author did not ensure that the groups with higher or lower marginal tax rates were similar before a change in the tax schedule. This means we are not confident that the estimated effects are attributable to changes in marginal taxes; other factors are likely to have contributed.

Reviewed by CLEAR

August 2019

Topic Area