Flat tax system and heterogeneity of self-employment

Abstract

Purpose

This paper aims to investigate the effect of the flat tax system on self-employment by necessity and by opportunity. Specifically, the paper examines whether individuals decide to switch from wage-employment to self-employment by necessity or by opportunity when government imposes a flat tax system.

Design/methodology/approach

To analyze the association of a flat tax system with occupational choice this paper uses both multinomial and ordinary logit models. In the multi-nominal logit model, this study separates dependent variables into three categories: wage employee, self-employed by necessity and self-employed by opportunity. In the second step of analyzes using the ordinary logit model, this paper studies only self-employed individuals by distinguishing them according to their preferences.

Findings

The results suggest that, in countries with the imposed flat tax system, the probability of being self-employed by necessity is low, while the probability of being self-employed by opportunity is high. Moreover, better economic growth in the country also elevates the chances of individuals to be self-employed by opportunity.

Originality/value

Out novel contribution is documenting that flat tax system in transition countries increases the number of individuals self-employed by opportunity compared to self-employed by necessity.

Citation

Safarov, S. and Abdurazzakova, D. (2022), "Flat tax system and heterogeneity of self-employment", Journal of Entrepreneurship in Emerging Economies, Vol. 14 No. 2, pp. 274-291. https://doi.org/10.1108/JEEE-06-2020-0175