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Incorporation and Taxation: Theory and Firm-level Evidence

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  • Peter Egger

    ()
    (Ifo Institute, University of Munich, WIFO and CESifo)

  • Christian Keuschnigg

    ()
    (University of St. Gallen (IFF-HSG))

  • Hannes Winner

    ()
    (University of Salzburg)

Abstract

This paper provides a theory and firm-level evidence on the incorporation decision of entrepreneurs in a model of taxes and corporate governance. The theory explains how the incorporation decision of entrepreneurs is driven by taxation (corporate and personal income taxes), corporate transparency, access to external capital and limited liability. We estimate features of this model using a large cross-section of more than 540, 000 firms in European manufacturing. We find that higher personal income tax rates favor incorporation while higher corporate tax rates reduce the probability to incorporate. These findings are robust to the inclusion of other economic and institutional determinants of external financing and choice of organizational form.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0908.

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Date of creation: 2009
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Handle: RePEc:btx:wpaper:0908

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Keywords: Incorporation; governance; taxes; discrete choice models;

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  1. Gentry, William M., 1994. "Taxes, financial decisions and organizational form : Evidence from publicly traded partnerships," Journal of Public Economics, Elsevier, vol. 53(2), pages 223-244, February.
  2. Roger H. Gordon & Jeffrey K. MacKie--Mason, 1994. "Tax Distortions to the Choice of Organizational Form," Public Economics 9401004, EconWPA, revised 18 Jan 1994.
  3. Goolsbee, Austan, 1998. "Taxes, organizational form, and the deadweight loss of the corporate income tax," Journal of Public Economics, Elsevier, vol. 69(1), pages 143-152, July.
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  16. Martynova, M. & Renneboog, L.D.R., 2010. "A Corporate Governance Index: Convergence and Diversity of National Corporate Governance Regulations," Discussion Paper 2010-17, Tilburg University, Center for Economic Research.
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  18. John Armour & Douglas Cumming, 2006. "The legislative road to Silicon Valley," Oxford Economic Papers, Oxford University Press, vol. 58(4), pages 596-635, October.
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Citations

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Cited by:
  1. Christian Keuschnigg & Evelyn Ribi, 2010. "Business Taxation, Corporate Finance and Economic Performance," University of St. Gallen Department of Economics working paper series 2010 2010-04, Department of Economics, University of St. Gallen.
  2. Mazhar Waseem, 2013. "Taxes, Informality and Income Shifting: Evidence from a Recent Pakistani Tax Reform," 2013 Papers pwa641, Job Market Papers.
  3. Christian Keuschnigg & Peter Egger & Hannes Winner, 2010. "A Theory of Taxation and Incorporation," University of St. Gallen Department of Economics working paper series 2010 2010-25, Department of Economics, University of St. Gallen.
  4. Andreas Haufler & Pehr-Johan Norbaeck & Lars Persson, 2011. "Entrepreneurial innovations and taxation," Working Papers 1122, Oxford University Centre for Business Taxation.
  5. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," Quantitative Macroeconomics Working Papers 20906, Hamburg University, Department of Economics.
  6. Li Liu, 2012. "Income Taxation and Business Incorporation: Evidence from the Early Twentieth Century," Working Papers 1205, Oxford University Centre for Business Taxation.
  7. Michael Devereux & Li Liu & Simon Loretz, 2012. "The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records," Working Papers 1223, Oxford University Centre for Business Taxation.
  8. Annette Alstadsater & Knut Reidar Wangen, 2010. "Small Corporations' Income Shifting through Choice of Ownership Structure - a Norwegian Case," Finnish Economic Papers, Finnish Economic Association, vol. 23(2), pages 73-87, Autumn.

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