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<p>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-in-differences design with Current Population Survey and American Community Survey microdata, modeling selection into self-employment with a Heckman selection model. The reform reduced weekly hours among the self-employed in the short run, with the response concentrated among the unincorporated self-employed, the group most directly exposed to the exemption. In our preferred selection-corrected estimates, the reform reduced annual labor supply among unincorporated self-employed workers by roughly 19 to 89 hours, depending on the dataset. The effect attenuates and does not persist. These findings suggest that the Kansas reform did not increase entrepreneurial effort on the intensive margin, despite its stated goal of promoting business activity.</p>

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The effect of the Kansas tax reform on self-employment hours worked

  • 期刊论文

  • 发表日期：

    2026年7月4日

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  • Ege Can,
  • Ke Lyu,
  • Hieu Pham,
  • Jingjing Yang

摘要

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-in-differences design with Current Population Survey and American Community Survey microdata, modeling selection into self-employment with a Heckman selection model. The reform reduced weekly hours among the self-employed in the short run, with the response concentrated among the unincorporated self-employed, the group most directly exposed to the exemption. In our preferred selection-corrected estimates, the reform reduced annual labor supply among unincorporated self-employed workers by roughly 19 to 89 hours, depending on the dataset. The effect attenuates and does not persist. These findings suggest that the Kansas reform did not increase entrepreneurial effort on the intensive margin, despite its stated goal of promoting business activity.