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

Author

Listed:
  • Fossen, Frank M.
  • Rees, Ray
  • Rostam-Afschar, Davud
  • Steiner, Viktor

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

  • Fossen, Frank M. & Rees, Ray & Rostam-Afschar, Davud & Steiner, Viktor, 2020. "The effects of income taxation on entrepreneurial investment: A puzzle?," Munich Reprints in Economics 84719, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:84719
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    Citations

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    Cited by:

    1. Hippolyte d’Albis & Agnès Bénassy-Quéré, 2022. "Taxing capital and labor when both factors are imperfectly mobile internationally," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(1), pages 147-190, February.
    2. Frank M. Fossen & Johannes König & Carsten Schröder, 2024. "Risk preference and entrepreneurial investment at the top of the wealth distribution," Empirical Economics, Springer, vol. 66(2), pages 735-761, February.
    3. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    4. Irina Bilan & Constantin-Marius Apostoaie, 2025. "Tax policy, corruption, and formal business entry: Cross-country evidence from emerging economies," Economic Change and Restructuring, Springer, vol. 58(2), pages 1-56, April.
    5. Hossain, Md Mobarak & Fossen, Frank M. & Mukhopadhyay, Sankar, 2025. "An Estimated Model of Employer and Non-Employer Entrepreneurship," IZA Discussion Papers 18009, IZA Network @ LISER.
    6. Can Ege & Fossen Frank M., 2026. "Income Taxation and Hours Worked in Different Types of Entrepreneurship," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 26(1), pages 245-297.
    7. Jannis Bischof & Joachim Gassen & Anna Rohlfing-Bastian & Davud Rostam-Afschar & Caren Sureth-Sloane, 2024. "Accounting for Transparency: a Framework and Three Applications in Tax, Managerial, and Financial Accounting," Schmalenbach Journal of Business Research, Springer, vol. 76(4), pages 573-611, December.
    8. 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.

    More about this item

    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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