This paper investigates the effect of entrepreneurs' personal income tax situations on their capital investment decisions. We examine the income tax returns of a sample of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates for the relatively affluent associated with that law affected their decisions to invest in physical capital. We find that individual income taxes exert a statistically and quantitatively significant influence on investment decisions. In our sample increase in marginal tax rates would reduce the proportion of entrepreneurs who make new capital investments by 10.4 percent, and decrease mean investment expenditures by 9.9 percent.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6374.
Length: Date of creation: Jan 1998 Date of revision: Handle: RePEc:nbr:nberwo:6374
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Find related papers by JEL classification: H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
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