The role of personal income taxes in corporate investment decisions

Year: 2022
Type: Journal Publication
Journal: Journal of Corporate Finance

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 27 European countries and three within-country approaches, we find that personal income taxes substantially reduce investment. The magnitude is comparable to the effect of corporate taxes. We also document that the PIT-investment relationship can be explained by increased labor costs and by reduced consumption due to higher PIT.

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 and Goethe University Frankfurt who share the same research agenda.