Document Type

Working Paper






Metropolitan Studies Program Series


We thank Esther Gray, Ann Wicks, and Jodi Woodson for their aid in preparing the manuscript. We are grateful to Lowell Dworin, Bo Honoré, Joel Slemrod, and attendees at both the April 1997 pre-conference and October 1997 conference for useful suggestions.


Economic Policy | Economics | Public Affairs, Public Policy and Public Administration | Public Policy


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, a 5 percentage point 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.


0732 507X

Additional Information

Metropolitan studies program series occasional paper no.192


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Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.



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