This paper analyzes the economic effects of different income splitting rules for closely held corporations and sole proprietorships/partnerships in a tax system with a dual income tax. We conclude that the tax rules for closed corporations offer roughly the same cost of capital as for widely held corporations. Compared to corporate firms, the cost of capital is lower for sole proprietorships/partnerships, because the income-splitting rules both neutralize the impact of the high labor income tax and avoid the two-tier taxation on the corporate form of organization. Adding risk to the model shows that closely held corporations have a lower cost of capital than would be the case without income-splitting rules.
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
2003:19.
Length: 22 pages Date of creation: 15 Jul 2003 Date of revision: Publication status: Published in International Tax and Public Finance, 2004, pages 469-485. Handle: RePEc:hhs:uunewp:2003_019
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Find related papers by JEL classification: H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
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