The effects of income taxation on entrepreneurial investment: A puzzle?

We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a portfolio choice model that allows for tax sheltering, we show that lower tax rates may increase investment in entrepreneurial equity at the intensive margin,...

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Bibliographic Details
Published in:International tax and public finance 2020-12, Vol.27 (6), p.1321-1363
Main Authors: Fossen, Frank M., Rees, Ray, Rostam-Afschar, Davud, Steiner, Viktor
Format: Article
Language:English
Subjects:
Business Taxation/Tax Law
Economics
Economics and Finance
Public Finance
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Summary:We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a portfolio choice model that allows for tax sheltering, we show that lower tax rates may increase investment in entrepreneurial equity at the intensive margin, but decrease it at the extensive margin. Using German panel data, we identify tax effects on the portfolio shares of six asset classes by exploiting tax and entry regulation reforms. Our results indicate that lower taxes drive out businesses that are viable only due to tax sheltering, but increase investment in productive entrepreneurial businesses.
ISSN:0927-5940
1573-6970
DOI:10.1007/s10797-020-09606-5