Flat tax system and heterogeneity of self-employment Sherzodbek Safarov Westminster International University in Tashkent, Tashkent, Uzbekistan, and Dilnovoz Abdurazzakova Department of Economics and Business, Central European University, Budapest, Hungary 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. Keywords Transition countries, Self-employment by opportunity, Flat tax system, Self-employment by necessity Paper type Research paper 1. Introduction Over the past two decades, a number of studies have focused on tax policy and its impact on entrepreneurship and innovation, risk tolerance and appetite of entrepreneurs and corruption in countries. Taxation policy has been one of the key drivers of entrepreneurial activity, which, in turn, is an essential driving force of the economy; growth and productivity performance heavily rely on the entrepreneurial capacity of the country (Wong et al., 2005)[1]. However, business activities are many times disturbed by, surprisingly, decisions of policymakers which are not very smart and reasonable. In particular, fiscal policymakers, using the tax as the main tool, have the power to significantly boost entrepreneurial activities by introducing lower marginal tax rates (Bruce and Mohsin, 2006). Otherwise, keeping the marginal tax rates high may lead to the bigger size of the informal sector in the economy (Block, 2016). In addition, in his study of entrepreneurship trends in Switzerland, Block (2016) concluded that a complex tax structure may reduce the entry rate of entrepreneurship in the country. Besides high marginal tax rates and complex tax structures, progressivity or flatness of tax rates may also have a significant impact on entrepreneurial incentives, though this topic Flat tax system Received 17 June 2020 Revised 6 October 2020 31 January 2021 Accepted 26 February 2021 Journal of Entrepreneurship in Emerging Economies © Emerald Publishing Limited 2053-4604 DOI 10.1108/JEEE-06-2020-0175 The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/2053-4604.htm