The Effect of the Kansas Tax Reform on Self-Employment Hours Worked

Abstract In 2012, Kansas exempted pass-through business income from the state individual income tax. We examine the reform’s causal effect on entrepreneurial labor supply using a difference-indifferences design with Current Population Survey and American Community Survey microdata. The reform caused an immediate, negative, and statistically significant reduction in weekly hours among the self-employed, with the largest response for the unincorporated. The effect attenuates and does not persist. This outcome contrasts with the reform’s goal of promoting business activity. These findings provide new evidence on the intensive margin impacts of tax policy on entrepreneurship.