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Economic Effects of Taxing Different Organizational Forms under a Dual Income Tax

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Author Info

  • Lindhe, Tobias

    (Swedish Ministry of Finance)

  • Södersten, Jan

    ()
    (Department of Economics)

  • Öberg, Ann

    ()
    (National Institute of Economic Research)

Abstract

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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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2003:19.

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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

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Dual income taxation; small business taxation; tax avoidance; income splitting; cost of capital;

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  1. Karlsson, Charlie & Acs, Zoltan J, 2002. " Introduction to Institutions, Entrepreneurship and Firm Growth: The Case of Sweden," Small Business Economics, Springer, vol. 19(2), pages 63-67, September.
  2. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "Taxing Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-1.
  3. Mikael Apel & Jan Södersten, 1999. "Personal Taxation and Investment Incentives in a Small Open Economy," International Tax and Public Finance, Springer, vol. 6(1), pages 79-88, February.
  4. Roger H. Gordon & Jeffrey K. MacKie-Mason & R. Glenn Hubbard, 1995. "The Importance of Income Shifting to the Design and Analysis of Tax Policy," NBER Chapters, in: Taxing Multinational Corporations, pages 29-38 National Bureau of Economic Research, Inc.
  5. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
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Cited by:
  1. Blomquist, Sören & Christiansen, Vidar, 2004. "Taxation and Heterogeneous Preferences," Working Paper Series 2004:9, Uppsala University, Department of Economics.
  2. Aronsson, Thomas & Blomquist, Sören, 2004. "Redistribution and Provision of Public Goods in an Economic Federation," Working Paper Series 2004:4, Uppsala University, Department of Economics.

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