If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number
02-21.
Length: 48 pages Abstract: This paper describes the positive effect that corporate income tax has on capital formation in the presence of liquidity constraints and uninsurable risk. The author uses a dynamic general-equilibrium model in which individuals choose whether to become entrepreneurs or workers. Workers save by holding corporate equity and therefore are subject to double taxation, as the return on their savings is taxed at both the corporate and personal level. Entrepreneurs, on the other hand, save by investing in their businesses and are taxed only at the personal level. This differential tax treatment results in an increase in capital accumulation because entrepreneurs must save in response to liquidity constraints and uninsurable risk. A calibrated version of the model is used to quantify the consequences of eliminating the corporate income tax. Interestingly, the removal of the corporate income tax decreases capital formation: by eliminating double taxation, the return on workers' savings increases, which in turn reduces the number of entrepreneurs. Consequently, the stock of capital decreases, since entrepreneurs have a higher marginal rate of saving than workers, as they save not only for life-cycle motives but to self-insure against business risk and to start and finance their businesses. Date of creation: 2002 Date of revision: Handle: RePEc:bca:bocawp:02-21
Find related papers by JEL classification: D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: