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Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities Can Be Harmful

  • Ralf Ewert
  • Rainer Niemann
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    We examine the combined effects of asymmetric taxation and limited liability on optimal risk taking of investors. Given an optimal risk level in the no-tax case under full liability, loss-offset restrictions reduce, and limited liability increases, the incentives for taking risk. For every degree of limited liability we find corresponding loss-offset limitations inducing the same optimal risk level as in the reference case. In our model, full liability requires symmetric taxation, and limited liability requires asymmetric taxation of profits and losses. Tax effects under risk aversion are similar to those under risk neutrality.

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    File URL: http://www.ingentaconnect.com/content/mohr/fa/2012/00000068/00000001/art00004
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    Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

    Volume (Year): 68 (2012)
    Issue (Month): 1 (March)
    Pages: 83-120

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    Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201203)68:1_83:llatar_2.0.tx_2-o
    DOI: 10.1628/001522108X632023
    Contact details of provider: Web page: https://www.mohr.de/fa

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    1. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
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    3. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(2), pages 107-26, March.
    4. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
    5. David Backus & Espen Henriksen & Kjetil Storesletten, 2007. "Taxes and the Global Allocation of Capital," NBER Working Papers 13624, National Bureau of Economic Research, Inc.
    6. Michael Devereux & Rachel Griffith, 1998. "The taxation of discrete investment choices," IFS Working Papers W98/16, Institute for Fiscal Studies.
    7. Burnham, Paul & Ozanne, Larry, 2006. "Distortions from Partial Tax Reform Revealed through Effective Tax Rates," National Tax Journal, National Tax Association, vol. 59(3), pages 611-30, September.
    8. Ruud de Mooij & S. Ederveen, 2001. "Taxation and foreign direct investment; a synthesis of empirical research," CPB Discussion Paper 3, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Boadway, R. W. & Bruce, N., 1979. "Depreciation and interest deductions and the effect of the corporation income tax on investment," Journal of Public Economics, Elsevier, vol. 11(1), pages 93-105, February.
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