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

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

Munich Reprints in Economics from University of Munich, Department of Economics

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.

Date: 2020
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Citations: View citations in EconPapers (7)

Published in International Tax and Public Finance 6 27(2020): pp. 1321-1363

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Journal Article: The effects of income taxation on entrepreneurial investment: A puzzle? (2020)
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