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Incorporation and Taxation: Theory and Firm-level Evidence

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Author Info
Peter Egger ()
Christian Keuschnigg ()
Hannes Winner ()

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Abstract

This paper provides theory and firm-level evidence on the incorporation decision of entrepreneurs in a model of corporate governance and taxation. 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. The impact of taxation on the incorporation decision is at the heart of this analysis. We find that higher personal income tax rates and their progression are associated with an increase in the probability of incorporation, while higher corporate tax rates entail an impediment to incorporate. This finding is robust to the inclusion of other economic and institutional determinants and to a variety of functional form assumptions about the latent variable in the estimated discrete choice model.

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Publisher Info
Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2008 with number 2008-20.

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Length: 46 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:usg:dp2008:2008-20

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

Other versions of this item:

Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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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.:
  1. Goolsbee, Austan, 2004. "The impact of the corporate income tax: evidence from state organizational form data," Journal of Public Economics, Elsevier, vol. 88(11), pages 2283-2299, September. [Downloadable!] (restricted)
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    Other versions:
  3. Andres Almazan & Javier Suarez & Sheridan Titman, 2007. "Firms' Stakeholders and the Costs of Transparency," NBER Working Papers 13647, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. John Armour & Douglas Cumming, 2008. "Bankruptcy Law and Entrepreneurship," American Law and Economics Review, Oxford University Press, vol. 10(2), pages 303-350. [Downloadable!] (restricted)
    Other versions:
  5. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, vol. 47(3), pages 243-277, March. [Downloadable!] (restricted)
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  7. Peter Sørensen, 2005. "Neutral Taxation of Shareholder Income," International Tax and Public Finance, Springer, vol. 12(6), pages 777-801, November. [Downloadable!] (restricted)
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  10. Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, vol. 52(2), pages 477-505, June. [Downloadable!] (restricted)
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  11. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1990. "Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form," NBER Working Papers 3222, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. John Armour & Douglas Cumming, 2006. "The legislative road to Silicon Valley," Oxford Economic Papers, Oxford University Press, vol. 58(4), pages 596-635, October. [Downloadable!] (restricted)
  14. Benjamin E. Hermalin & Michael S. Weisbach, 2007. "Transparency and Corporate Governance," NBER Working Papers 12875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Sivadasan, Jagadeesh & Slemrod, Joel, 2008. "Tax law changes, income-shifting and measured wage inequality: Evidence from India," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2199-2224, October. [Downloadable!] (restricted)
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  16. 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. [Downloadable!] (restricted)
  17. Richard Blundell & Monica Costa Dias, 2002. "Alternative approaches to evaluation in empirical microeconomics," CeMMAP working papers CWP10/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
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  18. 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. [Downloadable!] (restricted)
    Other versions:
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