NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Entrepreneurs, Income Taxes, and Investment

Robert Carroll, Douglas Holtz-Eakin, Mark Rider, Harvey S. Rosen

NBER Working Paper No. 6374
Issued in January 1998
NBER Program(s):   PE

This paper investigates the effect of entrepreneurs' personal income tax situations on their capital investment decisions. We examine the income tax returns of a sample of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates for the relatively affluent associated with that law affected their decisions to invest in physical capital. We find that individual income taxes exert a statistically and quantitatively significant influence on investment decisions. In our sample increase in marginal tax rates would reduce the proportion of entrepreneurs who make new capital investments by 10.4 percent, and decrease mean investment expenditures by 9.9 percent.

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Document Object Identifier (DOI): 10.3386/w6374

Published: Carroll, Robert, Douglas Holtz-Eakin, Mark Rider and Harvey S. Rosen. "Income Taxes And Entrepreneurs' Use Of Labor," Journal of Labor Economics, 2000, v18(2,Apr), 324-351.

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