No. 44: The role of personal income taxes in corporate investment decisions

Abstract

This paper examines the role of personal income taxes (PIT) in corporate investment decisions. Since PIT reduce consumption and increase cost of labor, investment decisions can be affected because of the inevitable link of production input factors. Using data on PIT in 30 European countries and a large sample of private firms, we find that personal income taxes substantially reduce investment. The magnitude is comparable to the effect of corporate taxes. We confirm this finding using three within-country settings where we explore local variation in PIT. Further, the PIT–investment association is stronger for lower-income earners, for firms facing more elastic employees, for firms with a stronger capital-labor-relation, for durable goods industries, and for financially constrained firms.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, ESMT Berlin, Goethe University Frankfurt and Carl von Ossietzky University Oldenburg who share the same research agenda.