Raising the stakes: How progressive tax rates affect risk-taking by pass-through businesses

Duke Ferguson; Trent J. Krupa; Rick C. Laux

doi:10.1111/1911-3846.12992

Raising the stakes: How progressive tax rates affect risk-taking by pass-through businesses

Duke Ferguson
, Trent J. Krupa
, Rick C. Laux

Accountancy

Research output: Contribution to journal › Article › peer-review

4 Citations (SciVal)

Abstract

We examine how progressive individual tax rates affect risk-taking by pass-through businesses (PTBs). PTBs generate over 60% of US business income and make up roughly 95% of business tax returns, yet there is limited research on how progressive tax rates affect project selection. We study PTBs using the setting of thoroughbred racing and examine how progressive tax rates affect the decision to enter a risky stakes race or a less risky allowance race. This setting provides a unique opportunity to observe the choice between two mutually exclusive projects that differ only in expected payoffs and risk. Using a difference-in-differences design surrounding the reduction in progressivity under the Tax Cuts and Jobs Act, we find that investment in stakes races increases in the United States relative to Canada. We find further evidence of a negative relation between progressive tax rates and risk-taking using a plausibly exogenous shock in progressivity in California and exploiting cross-sectional variation in the progressivity of state tax rates. Overall, our findings should be of interest to policy-makers considering changes to progressive rates. Results indicate that increases to progressive tax rates may discourage risk-taking by the small businesses that drive economic growth.

Original language	English
Pages (from-to)	39-69
Number of pages	31
Journal	Contemporary Accounting Research
Volume	42
Issue number	1
DOIs	https://doi.org/10.1111/1911-3846.12992
State	Published - Mar 1 2025

Bibliographical note

Publisher Copyright:
© 2024 The Author(s). Contemporary Accounting Research published by Wiley Periodicals LLC on behalf of Canadian Academic Accounting Association.

Funding

An earlier version of this paper was presented at the 2023 Contemporary Accounting Research Conference, generously supported by the Chartered Professional Accountants of Canada. We thank the National Thoroughbred Racing Association, the Jockey Club, and Equibase Inc. for providing data used in this study. We are grateful for helpful guidance from Jacob Thornock (editor) and two anonymous referees. We thank Michael Holmes of Winstar Farm and Adam Campbell of Blue and Co. LLC (Lexington, KY) for their comments on the paper and acknowledge that this paper has benefited from conversations with several industry professionals as well as helpful comments from Daphne Armstrong, Jennifer Blouin, Jennifer Glenn, Marshall Gramm (discussant), Erin Henry, Allison Koester (discussant), Devan Mescall, Erin Towery, Steven Utke, Jaron Wilde (discussant), the Boston University Tax Readings Group, and workshop participants at the 2021 UNC Tax Symposium, the 2021 ATA Midyear Meeting, the 2023 Contemporary Accounting Research Conference, and the University of Kentucky. Duke Ferguson acknowledges the support of the University of Kentucky Gatton College of Business and Economics. Trent Krupa acknowledges the support of the University of Arkansas Sam M. Walton College of Business and the Deloitte Foundation. Rick Laux acknowledges the support of the Oklahoma State University Spears School of Business and the Judy Johnson Fellowship.

Funders
University of Kentucky Gatton College of Business and Economics Von Allmen School of Accountancy
National Thoroughbred Racing Association
University of Kentucky
Deloitte & Touche Foundation
Michael Holmes of Winstar Farm and Adam Campbell of Blue and Co. LLC
The Jockey Club
Oklahoma State University Spears School of Business
Chartered Professional Accountants of Canada
Boston University Tax Readings Group

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth

Keywords

individual tax rates
investment
pass-through businesses
payoff asymmetry
progressive tax rates
risk-taking

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

Access to Document

10.1111/1911-3846.12992

Cite this

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abstract = "We examine how progressive individual tax rates affect risk-taking by pass-through businesses (PTBs). PTBs generate over 60\% of US business income and make up roughly 95\% of business tax returns, yet there is limited research on how progressive tax rates affect project selection. We study PTBs using the setting of thoroughbred racing and examine how progressive tax rates affect the decision to enter a risky stakes race or a less risky allowance race. This setting provides a unique opportunity to observe the choice between two mutually exclusive projects that differ only in expected payoffs and risk. Using a difference-in-differences design surrounding the reduction in progressivity under the Tax Cuts and Jobs Act, we find that investment in stakes races increases in the United States relative to Canada. We find further evidence of a negative relation between progressive tax rates and risk-taking using a plausibly exogenous shock in progressivity in California and exploiting cross-sectional variation in the progressivity of state tax rates. Overall, our findings should be of interest to policy-makers considering changes to progressive rates. Results indicate that increases to progressive tax rates may discourage risk-taking by the small businesses that drive economic growth.",

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Raising the stakes: How progressive tax rates affect risk-taking by pass-through businesses

Abstract

Bibliographical note

Funding

UN SDGs

Keywords

ASJC Scopus subject areas

Access to Document

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Cite this