Personal Taxes and Corporate Investment

Abstract

In this thesis, I present empirical evidence on the effect of personal taxes on firm-level investment. Exploiting a cross-country panel that consists of 40,608 firms from a total of 115 countries in the period 1999-2013, I employ a linear regression model in which I regress five different definitions of the personal tax wedge against capital investment of firms. I find that the average investment response of firms strongly depends on the definition of the personal tax wedge. My baseline regression reveals that, if the pure personal tax rate increases, firms on average show a positive capital investment response. That is, if firms cannot shift the economic burden of personal taxes to other stakeholders, an increase in personal taxes, ceteris paribus, increases the factor price of labour and thus exerts higher pressure on corporate profits. Profit-maximising firms therefore counteract this pressure by (partially) substituting the more expensive input factor labour by capital, increasing their capital investment. This effect, however, does not hold true for alternative definitions of the personal tax wedge that additionally include social security contributions. Likewise, I obtain mixed results when testing for cross-sectional variation in capital investment responses arising from differences in relative market power, the ability to substitute input factors, and financial constraints. In this context, my thesis provides empirical evidence on the effect of personal taxes on investment behaviour at the firm level and thus adds to current literature, which mainly considers the effect of personal taxes on aggregate investment, economic growth, and total factor productivity.

Keywords: investment; personal tax; tax wedge