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A Theory of Taxation and Incorporation

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Author Info

  • Christian Keuschnigg

    ()

  • Peter Egger

    ()

  • Hannes Winner

    ()

Abstract

This paper provides a theory of incorporation and taxation that emphasizes the role of the corporate legal form in facilitating access to external capital and the potential advantages of limited liability. Incorporation relaxes financing constraints and makes corporations larger than comparable non-corporate firms. For the same reason, a tax on corporations imposes a smaller first order welfare loss than a tax on non-corporate firms. Shifting the tax burden from non-corporate to corporate firms raises welfare, justifying some double taxation of corporate profits under a classical system. We compare the role of taxes with other institutional reforms and discuss how the theoretical results of the paper can be tested empirically.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2010/DP-1025-Ke.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 2010 with number 2010-25.

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Length: 34 pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:usg:dp2010:2010-25

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Keywords: Incorporation; corporate tax; external capital; limited liability;

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References

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