The Role of Personal Income Taxes in Corporate Investment Decisions

77 Pages Posted: 28 Jan 2021 Last revised: 29 Sep 2021

See all articles by Martin Jacob

Martin Jacob

University of Navarra, IESE Business School

Robert Vossebürger

WHU - Otto Beisheim School of Management

Date Written: September 28, 2021

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.

Keywords: Personal income taxation, corporate investment

JEL Classification: H25, H32, J23, M54,J31

Suggested Citation

Jacob, Martin and Vossebürger, Robert, The Role of Personal Income Taxes in Corporate Investment Decisions (September 28, 2021). TRR 266 Accounting for Transparency Working Paper Series No. 44, Available at SSRN: https://ssrn.com/abstract=3744357 or http://dx.doi.org/10.2139/ssrn.3744357

Martin Jacob (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Robert Vossebürger

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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