Advanced Search
MyIDEAS: Login to save this paper or follow this series

Should Continued Family Firms Face Lower Taxes than other Estates?

Contents:

Author Info

  • Holger Strulik
  • Volker Grossmann

Abstract

Inheritance taxes may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the targeted persons, i.e. the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. 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.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-02/cesifo1_wp2235.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2235.

as in new window
Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:ces:ceswps:_2235

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: bequest taxation; creative destruction; entrepreneurship; family firms; preferential tax treatment;

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Heer, Burkhard, 2000. "Wealth Distribution and Optimal Inheritance Taxation in Life-Cycle Economies with Intergenerational Transfers," Discussion Papers in Economics, University of Munich, Department of Economics 25, University of Munich, Department of Economics.
  2. Bloom, Nicholas & Van Reenen, John, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5581, C.E.P.R. Discussion Papers.
  3. Gale, William G. & Slemrod, Joel, 2001. "Rhetoric and Economics in the Estate Tax Debate," National Tax Journal, National Tax Association, vol. 54(n. 3), pages 613-27, September.
  4. C. Praag & Peter Versloot, 2007. "What is the value of entrepreneurship? A review of recent research," Small Business Economics, Springer, Springer, vol. 29(4), pages 351-382, December.
  5. Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "The Regulation of Entry," Working Paper 19462, Harvard University OpenScholar.
  6. Francesco Caselli & Nicola Gennaioli, 2003. "Dynastic Management," NBER Working Papers 9442, National Bureau of Economic Research, Inc.
  7. Raquel Fonseca & Pierre-Carl Michaud & Thepthida Sopraseuth, 2007. "Entrepreneurship, Wealth, Liquidity Constraints and Start-up Costs," Working Papers, RAND Corporation Publications Department 500, RAND Corporation Publications Department.
  8. Holger Strulik & Volker Grossmann, 2008. "Should Continued Family Firms Face Lower Taxes than other Estates?," CESifo Working Paper Series 2235, CESifo Group Munich.
  9. Marco Cagetti & Mariacristina De Nardi, 2003. "Entrepreneurship, frictions and wealth," Working Papers, Federal Reserve Bank of Minneapolis 620, Federal Reserve Bank of Minneapolis.
  10. Gentry William M. & Hubbard R. Glenn, 2004. "Entrepreneurship and Household Saving," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 4(1), pages 1-57, August.
  11. Bossmann, Martin & Kleiber, Christian & Walde, Klaus, 2007. "Bequests, taxation and the distribution of wealth in a general equilibrium model," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1247-1271, August.
  12. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 116, Federal Reserve Bank of Minneapolis.
  13. Weil, David N, 1994. "The Saving of the Elderly in Micro and Macro Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(1), pages 55-81, February.
  14. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, Elsevier, vol. 40(8), pages 1521-1540, November.
  15. Villalonga, Belen & Amit, Raphael, 2006. "How do family ownership, control and management affect firm value?," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(2), pages 385-417, May.
  16. Officer, Micah S., 2007. "The price of corporate liquidity: Acquisition discounts for unlisted targets," Journal of Financial Economics, Elsevier, Elsevier, vol. 83(3), pages 571-598, March.
  17. Andrei Shleifer & Fausto Panunzi & Mike Burkart, 2002. "Family Firms," FMG Discussion Papers, Financial Markets Group dp406, Financial Markets Group.
  18. Marco Cagetti & Mariacristina De Nardi, 2009. "Estate Taxation, Entrepreneurship, and Wealth," American Economic Review, American Economic Association, American Economic Association, vol. 99(1), pages 85-111, March.
  19. Emmanuel Farhi & Ivan Werning, 2005. "Inequality, Social Discounting and Estate Taxation," NBER Working Papers 11408, National Bureau of Economic Research, Inc.
  20. Morten Bennedsen & Kasper Meisner Nielsen & Francisco Pérez-González & Daniel Wolfenzon, 2007. "Inside the Family Firm: the Role of Families in Succession Decisions and Performance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(2), pages 647-691, 05.
  21. Marco Cagetti & Mariacristina De Nardi, 2004. "Taxation, entrepreneurship, and wealth," Staff Report, Federal Reserve Bank of Minneapolis 340, Federal Reserve Bank of Minneapolis.
  22. Joel Slemrod & Wojciech Kopczuk, 2000. "The Impact of the Estate Tax on the Wealth Accumulation and Avoidance Behavior of Donors," NBER Working Papers 7960, National Bureau of Economic Research, Inc.
  23. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
  24. Douglas Holtz-Eakin & Donald Marples, 2001. "Distortion Costs of Taxing Wealth Accumulation: Income Versus Estate Taxes," NBER Working Papers 8261, National Bureau of Economic Research, Inc.
  25. Francisco Pérez-González, 2006. "Inherited Control and Firm Performance," American Economic Review, American Economic Association, American Economic Association, vol. 96(5), pages 1559-1588, December.
  26. William G. Gale & Joel B. Slemrod, 2001. "Rethinking the Estate and Gift Tax: Overview," NBER Working Papers 8205, National Bureau of Economic Research, Inc.
  27. Marianne Bertrand & Antoinette Schoar, 2006. "The Role of Family in Family Firms," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(2), pages 73-96, Spring.
  28. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  29. Casey B. Mulligan, 1999. "Galton versus the Human Capital Approach to Inheritance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(S6), pages S184-S224, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Holger Strulik & Volker Grossmann, 2008. "Should Continued Family Firms Face Lower Taxes than other Estates?," CESifo Working Paper Series 2235, CESifo Group Munich.
  2. Lindner, Ines & Strulik, Holger, 2011. "From Tradition to Modernity: Economic Growth in a Small World," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-478, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  3. Houben, Henriette & Maiterth, Ralf, 2009. "Inheritance tax-exempt transfer of German businesses: Imperative or unjustified subsidy? An empirical analysis," arqus Discussion Papers in Quantitative Tax Research 95, arqus - Arbeitskreis Quantitative Steuerlehre.
  4. Johann K. Brunner, 2012. "The Bequest Tax as Long-Term Care Insurance," CESifo Working Paper Series 3901, CESifo Group Munich.
  5. Houben, Henriette & Maiterth, Ralf, 2009. "Zurück zum Zehnten: Modelle für die nächste Erbschaftsteuerreform," arqus Discussion Papers in Quantitative Tax Research 69, arqus - Arbeitskreis Quantitative Steuerlehre.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2235. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.