Raising the Stakes: How Individual Taxes Affect Risk-Taking by Pass-Through Businesses
44 Pages Posted: 1 Mar 2021 Last revised: 7 Apr 2021
Date Written: February 26, 2021
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: Suggested Citation