We show that the current U.S. progressive personal income tax system is superior to a counterfactual flat tax reform in terms of promoting entrepreneurship in a heterogeneous agent life cycle model with occupational choice and financial frictions. Our key innovation is to introduce non-trivial uncertainty faced by entrepreneurs and an endogenous learning process about their innate entrepreneurial ability such that the uncertainty can be reduced via learning over the life cycle. Both elements are supported and disciplined by novel subjective belief survey data on business owners. We find that switching to a revenue-neutral flat business income tax scheme reduces the aggregate entrepreneur share in the working-age population from 9% to 6%. Not only the share of the young entrepreneurs declines, but that at older ages declines even further. Moreover, agents with high innate productivity lose more from the flat tax reform. The logic is that if the young do not enter to learn about their innate entrepreneurial ability, they will not choose to be an entrepreneur when they are old either since the value of learning is decreasing in age, and progressive taxation favors the young by imposing lower tax burden and providing higher insurance value, thus resolving uncertainty and improving occupation allocation earlier. The main takeaway is that without encouraging agents to enter to discover their entrepreneurial aptitudes, those with high innate productivity may never become an entrepreneur, and thus entrepreneurship-boosting policies should prioritize the young as it will eventually benefit the old successful entrepreneurs who grow up from the young talents.
