The Role of Personal Income Taxes in Corporate Investment Decisions
77 Pages Posted: 28 Jan 2021 Last revised: 29 Sep 2021
Date Written: September 28, 2021
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.
Keywords: Personal income taxation, corporate investment
JEL Classification: H25, H32, J23, M54,J31
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