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

Author

Listed:
  • Frank M. Fossen

    (University of Nevada
    IZA)

  • Ray Rees

    (Ludwig-Maximilians-Universität München)

  • Davud Rostam-Afschar

    (Universität Mannheim
    Universität Hohenheim)

  • Viktor Steiner

    (Freie Universität Berlin)

Abstract

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.

Suggested Citation

  • Frank M. Fossen & Ray Rees & Davud Rostam-Afschar & Viktor Steiner, 2020. "The effects of income taxation on entrepreneurial investment: A puzzle?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1321-1363, December.
    • Handle: RePEc:kap:itaxpf:v:27:y:2020:i:6:d:10.1007_s10797-020-09606-5
    DOI: 10.1007/s10797-020-09606-5
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    Cited by:

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    4. Ege Can, 2022. "Income taxation, entrepreneurship, and incorporation status of self-employment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1260-1293, October.

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    More about this item

    Keywords

    Taxation; Entrepreneurship; Portfolio choice; Tax sheltering; Investment;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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