EconPapers    
Economics at your fingertips  
 

How Do Entrepreneurial Portfolios Respond to Income Taxation?

Frank Fossen, Ray Rees, Davud Rostam-Afschar and Viktor Steiner

No 922, SOEPpapers on Multidisciplinary Panel Data Research from DIW Berlin, The German Socio-Economic Panel (SOEP)

Abstract: We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a reformulation of the standard portfolio choice model that allows for underreporting of private business income to tax authorities, we show that a fall in the tax rate may increase investment in risky entrepreneurial business equity at the intensive margin, but decrease entrepreneurial investment at the extensive margin. To test these hypotheses, we use household survey panel data for Germany eliciting the personal wealth composition in detail in 2002, 2007, and 2012. We analyze the effects of personal income taxes on the portfolio shares of six asset classes of private households, including private business equity. In a system of simultaneous demand equations in first differences, we identify the tax effects by an instrumental variables approach exploiting tax reforms during our observation period. To account for selection into entrepreneurship, we use changes in entry regulation into skilled trades. Estimation results are consistent with the predictions of our theoretical model. An important policy insight is that lower taxes drive out businesses that are viable only due to tax avoidance or evasion, but increase investment in private businesses that are also worthwhile in the absence of taxes.

Keywords: Taxation; entrepreneurship; portfolio choice; investment (search for similar items in EconPapers)
JEL-codes: H24 H25 H26 L26 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent, nep-iue, nep-pbe, nep-pub and nep-sbm
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.diw.de/documents/publikationen/73/diw_01.c.563081.de/diw_sp0922.pdf (application/pdf)

Related works:
Working Paper: How Do Entrepreneurial Portfolios Respond to Income Taxation? (2017) Downloads
Working Paper: How do entrepreneurial portfolios respond to income taxation? (2017) Downloads
Working Paper: How do entrepreneurial portfolios respond to income taxation? (2017) Downloads
Working Paper: How Do Entrepreneurial Portfolios Respond to Income Taxation? (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:diw:diwsop:diw_sp922

Access Statistics for this paper

More papers in SOEPpapers on Multidisciplinary Panel Data Research from DIW Berlin, The German Socio-Economic Panel (SOEP) Contact information at EDIRC.
Bibliographic data for series maintained by Bibliothek ().

 
Page updated 2018-10-16
Handle: RePEc:diw:diwsop:diw_sp922