Taxation of Entrepreneurs Relative to Well Diversified Investors - A Swedish Perspective
AbstractThe paper argues that cost of capital comparisons across closely held companies and entrepreneurial ventures on the one hand and widely held companies on the other, ought not to be based on an equal level assumption regarding the investors’ required rates of return, net of taxes. Theoretical considerations as well as empirical evidence show that the return requirements are much higher on investments by entrepreneurs in venture startups than on those by well diversified investors. Using earlier results based on the capital asset pricing model (CAPM), it is shown that the difference can be as high as a factor three. Given these circumstances, the paper concludes that by more or less neglecting this difference, the Swedish dual income tax system heavily discriminates against entrepreneurship and growth of small firms. This should be a lesson to other countries considering the mitigation of effects of capital mobility by a dual income tax, i.e. by using standardized measures of the amount of capital income to be taxed at lower rates than labour.
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Bibliographic InfoPaper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 632.
Length: 22 pages
Date of creation: 30 Oct 2004
Date of revision:
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Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Phone: +46 8 665 4500
Fax: +46 8 665 4599
Web page: http://www.ifn.se/
More information through EDIRC
Tax Neutrality; Entrepreneurship; Dual Income Taxation; Cost of Capital;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
This paper has been announced in the following NEP Reports:
- NEP-ACC-2004-12-02 (Accounting & Auditing)
- NEP-ALL-2004-12-02 (All new papers)
- NEP-EEC-2004-12-03 (European Economics)
- NEP-ENT-2004-12-02 (Entrepreneurship)
- NEP-FIN-2004-12-02 (Finance)
- NEP-PBE-2004-12-02 (Public Economics)
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