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Incorporation and Taxation: Theory and Firm-level Evidence

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  • Peter Egger

    ()

  • Christian Keuschnigg

    ()

  • Hannes Winner

    ()

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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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2008/DP-20-Eg.pdf
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Bibliographic 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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Keywords: Incorporation; governance; taxes; discrete choice models;

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References

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  1. Cullen, Julie Berry & Gordon, Roger H., 2007. "Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1479-1505, August.
  2. Peter Egger & Doina Maria Radulescu, 2008. "Labour Taxation and Foreign Direct Investment," CESifo Working Paper Series 2309, CESifo Group Munich.
  3. Roger H. Gordon & Jeffrey K. MacKie--Mason, 1994. "Tax Distortions to the Choice of Organizational Form," Public Economics 9401004, EconWPA, revised 18 Jan 1994.
  4. 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.
  5. 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.
  6. Jagadeesh Sivadasan & Joel Slemrod, 2006. "Tax Law Changes, Income Shifting and Measured Wage Inequality: Evidence from India," NBER Working Papers 12240, National Bureau of Economic Research, Inc.
  7. Robert M. Bushman & Joseph D. Piotroski & Abbie J. Smith, 2004. "What Determines Corporate Transparency?," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 207-252, 05.
  8. John Armour & Douglas Cumming, 2006. "The legislative road to Silicon Valley," Oxford Economic Papers, Oxford University Press, vol. 58(4), pages 596-635, October.
  9. Roger H. Gordon, 1998. "Can High Personal Tax Rates Encourage Entrepreneurial Activity?," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 49-80, March.
  10. Jeffrey K. MacKie-Mason & Roger H. Gordon, 1994. "How Much Do Taxes Discourage Incorporation?," Public Economics 9401002, EconWPA.
  11. Andres Almazan & Javier Suarez & Sheridan Titman, 2009. "Firms' Stakeholders and the Costs of Transparency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 871-900, 09.
  12. Peter Sørensen, 2005. "Neutral Taxation of Shareholder Income," International Tax and Public Finance, Springer, vol. 12(6), pages 777-801, November.
  13. Martynova, M. & Renneboog, L.D.R., 2010. "A Corporate Governance Index: Convergence and Diversity of National Corporate Governance Regulations," Discussion Paper 2010-012, Tilburg University, Tilburg Law and Economic Center.
  14. Benjamin E. Hermalin & Michael S. Weisbach, 2007. "Transparency and Corporate Governance," NBER Working Papers 12875, National Bureau of Economic Research, Inc.
  15. 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.
  16. 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.
  17. repec:nbr:nberch:3051 is not listed on IDEAS
  18. John Armour & Douglas Cumming, 2005. "Bankruptcy Law and Entrepreneurship," ESRC Centre for Business Research - Working Papers wp300, ESRC Centre for Business Research.
  19. Austan Goolsbee, 1997. "Taxes, Organizational Form, and the Deadweight Loss of the Corporate Income Tax," NBER Working Papers 6173, National Bureau of Economic Research, Inc.
  20. 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.
  21. Jeremy Berkowitz & Michelle J. White, 2004. "Bankruptcy and Small Firms' Access to Credit," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 69-84, Spring.
  22. Erik Fjaerli & Diderik Lund, 2001. "The choice between owner's wages and dividends under the dual income tax," Finnish Economic Papers, Finnish Economic Association, vol. 14(2), pages 104-119, Autumn.
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Citations

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Cited by:
  1. Andreas Haufler & Pehr-Johan Norbaeck & Lars Persson, 2011. "Entrepreneurial innovations and taxation," Working Papers 1122, Oxford University Centre for Business Taxation.
  2. Annette Alstadsater & Knut Reidar Wangen, 2010. "Small Corporations' Income Shifting through Choice of Ownership Structure - a Norwegian Case," Finnish Economic Papers, Finnish Economic Association, vol. 23(2), pages 73-87, Autumn.
  3. Michael Devereux & Li Liu & Simon Loretz, 2012. "The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records," Working Papers 1223, Oxford University Centre for Business Taxation.
  4. Li Liu, 2012. "Income Taxation and Business Incorporation: Evidence from the Early Twentieth Century," Working Papers 1205, Oxford University Centre for Business Taxation.
  5. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," CESifo Working Paper Series 2692, CESifo Group Munich.

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