The responsiveness of self-employment income to tax rate changes

This paper estimates the extent to which self-employment income responds to changes in the net-of-tax share using a panel of tax returns that spans 1987–1996. The results suggest that the elasticity of reported self-employment income to the net-of-tax share is approximately .9, implying a real elasticity (net of any reporting response) of around .4. Estimated elasticities tend to be larger for higher income taxpayers, married males, and females. In addition, the elasticity of self-employment income is considerably larger than the elasticity wage and salary income estimated using the same methodology.