This paper investigates the effect of entrepreneurs’ personal income tax situations on their
use of labor. We analyze the income tax returns of a large number of sole proprietors before and
after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax
rates associated with that law affected their decisions to hire labor and the size of their wage
bills. We find that individual income taxes exert a statistically and quantitatively significant
influence on the probability that an entrepreneur hires workers. A 6 percentage point reduction
in the marginal tax rate of an entrepreneur in the 39.6 percent bracket induces an approximately
1 1.8 percent increase in the probability that he hires labor. Further, conditional on hiring
employees, taxes also influence the total wage payments to those workers. The elasticity of the
median wage bill with respect to the marginal tax rate is about 0.397.

This paper examines tax return-generated data on the labor force behavior of people
before and after they receive inheritances. The results are consistent with Andrew Camegie’s
century-old assertion that large inheritances decrease a person's labor force participation. For
example, a single person who receives an inheritance of about $150,000 is roughly four times
more likely to leave the labor force than a person with an inheritance below $25,000.
Additional, albeit weaker, evidence suggests that large inheritances depress labor supply, even
when participation is unaltered.

This paper considers estimation and testing of vector autoregression coefficients in panel data, and uses the techniques to analyze the dynamic
properties of wages and hours among American males. The model allows for non-
stationary individual effects, and is estimated by applying instrumental
variables to the quasi—differenced autoregressive equations. Particular
attention is paid to specifying lag lengths and forming convenient test
statistics. The empirical results suggest that the wage equation contains at
most a single lag of hours and wages, and that one cannot reject the hypothesis that lagged hours may be excluded from the wage equation. Our results
also show that lagged hours is important in the hours equation, which is
consistent with alternatives to the simple labor supply model that allow for
costly hours adjustment or preferences that are not time separable.

This paper analyzes the role of liquidity constraints in the formation of new
entrepreneurial enterprises. The basic empirical strategy is to determine whether an
individual's wealth affects the probability of becoming an entrepreneur, and the conditional
amounts of depreciable assets and interest deductions, ceteris paribus. If so, liquidity
constraints are likely to be present. To be successful, such a research strategy requires a
measure of asset variation that is both precisely measured and exogenous to the
entrepreneurial decision. Our data are uniquely well-suited for this purpose. The sample
consists of the 1981 and l985 federal tax returns of a group of people who received
inheritances in 1982 and l983, along with information on the size of those inheritances from
a matched set of estate tax returns. Hence, we can examine how the exogenous receipt of
capital affects the decision to become an entrepreneur and important financial characteristics.
of new enterprises.
Our results suggest that the size of the inheritance has little effect on the probability of
becoming an entrepreneur, but that conditional on becoming an entrepreneur, the size of the
inheritance has a statistically significant and quantitatively important effect on the amount of
capital employed. The conditional elasticity is 0.45. Thus, liquidity constraints matter, but
not in the fashion suggested in some earlier investigations.

We examine why some individuals survive as entrepreneurs and others do not. In
addition. we analyze the growth of entrepreneurial enterprises, conditional on surviving. Our
focus is on the role of access to capital--to what extent do liquidity constraints increase the
likelihood of entrepreneurial failure?
The empirical strategy is based on the following logic: If entrepreneurs cannot borrow
to attain their profit-maximizing levels of capital, then those entrepreneurs who have substantial
personal financial resources will be more successful than those who do not. The data consist of
the 1981 and 1985 federal individual income tax returns of a group of people who received
inheritances. These data allow us to identify those individuals who were sole proprietors in
1981, and to determine the extent to which the decision to remain a sole proprietor was
influenced by the magnitude of the inheritance-induced increase in liquidity.
The results are consistent with the notion that liquidity constraints exert a noticeable
influence on the viability of entrepreneurial enterprises. For example, a $150,000 inheritance
increases the probability that an individual will continue as a sole proprietor by 1.3 percentage
points, and conditional on surviving, the receipts of the enterprise increase by almost 20
percent.