The Role of Personal Income Taxes in Corporate Investment Decisions

Abstract

This paper examines the role of personal income taxes in corporate investment decisions. Since personal income taxes increase the cost of labor, firms’ investment decisions can be affected because of the inevitable link of production input factors. Using data on personal income taxes 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 and value-added taxes. The effect is stronger for low-income earners vis-à-vis high-income earners and for firms with a stronger link between capital and labor input.

Keywords: Personal income taxation, corporate investment

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