Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/162782
Authors: 
Fossen, Frank M.
Rees, Ray
Rostam-Afschar, Davud
Steiner, Viktor
Year of Publication: 
2017
Series/Report no.: 
Discussion Paper, School of Business & Economics: Economics 2017/19
Abstract: 
We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a reformulation of the standard portfolio choice model that allows for underreporting of private business income to tax authorities, we show that a fall in the tax rate may increase investment in risky entrepreneurial business equity at the intensive margin, but decrease entrepreneurial investment at the extensive margin. To test these hypotheses, we use household survey panel data for Germany eliciting the personal wealth composition in detail in 2002, 2007, and 2012. We analyze the effects of personal income taxes on the portfolio shares of six asset classes of private households, including private business equity. In a system of simultaneous demand equations in first differences, we identify the tax effects by an instrumental variables approach exploiting tax reforms during our observation period. To account for selection into entrepreneurship, we use changes in entry regulation into skilled trades. Estimation results are consistent with the predictions of our theoretical model. An important policy insight is that lower taxes drive out businesses that are viable only due to tax avoidance or evasion, but increase investment in private businesses that are also worthwhile in the absence of taxes.
Subjects: 
taxation
entrepreneurship
portfolio choice
investment
JEL: 
H24
H25
H26
L26
G11
Document Type: 
Working Paper

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