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Taxation of closely held corporations – efficiency aspects

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  • Peter Ericson

    ()
    (Confederation of Swedish Enterprise, SE-114 82 Stockholm, Sweden)

  • Johan Fall

    ()
    (Confederation of Swedish Enterprise, SE-114 82 Stockholm, Sweden)

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    Abstract

    This paper investigates two questions regarding closely held corporations. First, possible differences between closely and widely held corporations are explored. Second, a model is developed to investigate what factors and to what extent these factors influence a person to become an active owner of a closely held corporation. A background to the first question is that profits in closely held corporations in Sweden may be taxed as labour income, with a progressive marginal tax, while profits in corporations with broad ownership are taxed as capital income, at a flat rate. If the expected return after tax is lower in closely held corporations compared to corporations with a broad ownership, entrepreneurs and investors will demand a higher pre-tax risk-adjusted return. Evidence from Swedish data, covering all Swedish corporations, does not seem to reject these hypotheses. The model developed to address the second question utilizes extensive individual panel data. Some simple simulations are carried out, indicating that changes in taxation have important impact on the propensity to become a closely held corporation owner. A conclusion is that the tax-system restrains entrepreneurship and potentially employment and growth. Some suggestions to improve and expand the model are issued. Remaining key questions are e.g. how do changes in the tax rules for closely held corporations affect efficiency aspects with significance for e.g. employment, government tax revenue and income distribution.

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    Bibliographic Info

    Article provided by Interational Microsimulation Association in its journal International Journal of Microsimulation.

    Volume (Year): 4 (2011)
    Issue (Month): 2 ()
    Pages: 27-40

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    Handle: RePEc:ijm:journl:v:4:y:2011:i:2:p:27-40

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    Web page: http://ima.natsem.canberra.edu.au/index.htm

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    1. Ruud de Mooij & Gaetan Nicodeme, 2007. "Corporate tax policy and incorporation in the EU," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 11, Directorate General Taxation and Customs Union, European Commission, revised Nov 2007.
    2. de Wit, Gerrit, 1993. " Models of Self-Employment in a Competitive Market," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 7(4), pages 367-97, December.
    3. Rolf Aaberge & Ugo Colombino, 2008. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp06_08, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
    4. Ruud A. de Mooij & Gaetan Nicodeme, 2007. "Corporate Tax Policy, Entrepreneurship and Incorporation in the EU," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-030/3, Tinbergen Institute.
    5. Bernd Genser & Andreas Reutter, 2007. "Moving Towards Dual Income Taxation in Europe," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0717, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    6. Asoni, Andrea & Sanandaji, Tino, 2009. "Taxation and the Quality of Entrepreneurship," Working Paper Series, Research Institute of Industrial Economics 813, Research Institute of Industrial Economics, revised 30 Oct 2013.
    7. Ericson, Peter & Flood, Lennart & Wahlberg, Roger, 2009. "SWEtaxben: A Swedish Tax/Benefit Micro Simulation Model and an Evaluation of a Swedish Tax Reform," IZA Discussion Papers 4106, Institute for the Study of Labor (IZA).
    8. Roger H. Gordon & Julie Berry Cullen, 2002. "Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S," NBER Working Papers 9015, National Bureau of Economic Research, Inc.
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