The Role of Personal Income Taxes in Corporate Investment Decisions
Prof. Martin Jacob
Professor of Finance, Accounting, and Taxation
WHU – Otto Beisheim School of Management
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. 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.