Raising the Stakes: How Individual Taxes Affect Risk-Taking by Pass-Through Businesses

44 Pages Posted: 1 Mar 2021 Last revised: 7 Apr 2021

See all articles by Victor Ferguson

Victor Ferguson

Mississippi State University

Trent Krupa

University of Connecticut - Department of Accounting

Rick Laux

Purdue University

Date Written: February 26, 2021

Abstract

Pass-through businesses (PTBs) generate over 60 percent of total business income in the U.S. Despite their economic significance, little is known about how individual taxes affect economic decisions by PTBs. We begin to fill this gap by examining how individual tax rates affect risk-taking by PTBs. We are able to study PTBs using the unique setting of thoroughbred racing and how taxes affect the decision to enter thoroughbreds in risky stakes races or less risky allowance races. The setting is advantageous because we can observe the choice between two discrete investment options with varying levels of risk. Using multiple difference-in-differences designs that exploit plausibly exogenous changes in federal and state tax rates, we find that higher taxes discourage risk-taking. Despite the common belief that firms with losses prefer pass-through treatment, our findings suggest that owners of PTBs still face a significant degree of tax loss asymmetry, which affects investment behavior.

Keywords: Investment, Risk-Taking, Individual Tax Rates, Pass-Through Businesses, Loss Limitations

JEL Classification: H24, H32

Suggested Citation

Ferguson, Victor and Krupa, Trent and Laux, Rick C., Raising the Stakes: How Individual Taxes Affect Risk-Taking by Pass-Through Businesses (February 26, 2021). University of Connecticut School of Business Research Paper No. 21-07, Available at SSRN: https://ssrn.com/abstract=3793969 or http://dx.doi.org/10.2139/ssrn.3793969

Victor Ferguson

Mississippi State University ( email )

Mississippi State, MS 39762
United States

Trent Krupa

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Rick C. Laux (Contact Author)

Purdue University ( email )

Rawls Hall 4036
100 S. Grant Street
West Lafayette, IN 47906
United States

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