Income Taxation and Hours Worked in Different Types of Entrepreneurship

We investigate the effect of changes in personal income tax (PIT) rates on the hours worked by entrepreneurs. Using rotating panel data from the U.S. March Current Population Survey spanning 2003–2019, we estimate instrumental variable regressions in first differences to exploit tax code changes for identification. We distinguish between self-employed owners of incorporated and unincorporated businesses. The findings reveal that higher PIT rates increase the hours worked among incorporated entrepreneurs, potentially due to tax avoidance strategies. We do not find a significant response to PIT rates among unincorporated entrepreneurs.