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Spring 2014
ISSN 0890-913X
Volume 29, Number 2

Being Able to Keep Your Money Matters: How Tax Policy and Limited Liability Laws Affect Entrepreneurship

Tianning Li, Hood College
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TheJournalofPrivateEnterprise29(2),2014,101110BeingAbletoKeepYourMoneyMatters:HowTaxPolicyandLimitedLiabilityLawsAffectEntrepreneurshipTianningLiHoodCollege______________________________________________________AbstractEntrepreneursoutsidewealthispositivelyrelatedtotheirfirm-levelfinancialleverage.Entrepreneurshavemoreincentivetousefinancialleveragewhentheycanaccumulatewealthandnotrisktheirpersonalassetswhenseekingbusinessloans.Myresultsindicatethatwealthtaxcutsonentrepreneurswillencourageself-employmentandgiveentrepreneurstheabilitytousemorefinancialleverage.______________________________________________________JELCodes:G32,G38,L26Keywords:Entrepreneurship,Financialleverage,Wealth,Limitedliabilityprotection,TaxcutsI.IntroductionSmallbusinessesplayavitalroleintheeconomy.AccordingtoKobe(2007),smallfirmsaccountforapproximately50percentofnonfarmrealGDPand50percentofthejobgrowthintheperiodfrom1998to2004.Mostsmallbusinessesownerspaypersonalincometaxesontheirprofitsratherthancorporatetaxes.AsofMay2013,fouryearssincetheeconomicrecoverybeganinJune2009,thenationalunemploymentratehasremainedhigh,inthemid-7percentrange.Manyeconomistssuggesttaxcutsandlessregulationaspoliciestoboosteconomicgrowthandcreatejobs.Inadditiontocallingforcutsincorporateincometaxes,agrowingnumberofproposalshavebeencallingforcutsinpersonalincometaxes.Certainauthorshavefoundthathigherincometaxrates(federalandstate)haveeitherlittleorpositiveeffectsonself-employment(Long1982;Blau1987;Parker1996;CowlingandMitchell1997;Robson1998;BruceandDeskins2010).Opponentsoftaxcutsthereforeusethesefindingstoargueagainstanytypesoftaxcut.Evidencesuggests,however,thatproperty,inheritance,andgifttaxcutscanhelpentrepreneurship(Bartick1989;KreftandSobel2003;BruceandDeskins2012).Wealthisanimportantfactorresponsible101
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