A Theory of Taxation and Incorporation
AbstractThis 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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Bibliographic InfoPaper 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.
Length: 34 pages
Date of creation: Aug 2010
Date of revision:
Incorporation; corporate tax; external capital; limited liability;
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
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-08-21 (Accounting & Auditing)
- NEP-ALL-2010-08-21 (All new papers)
- NEP-BEC-2010-08-21 (Business Economics)
- NEP-PBE-2010-08-21 (Public Economics)
- NEP-PUB-2010-08-21 (Public Finance)
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