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Stimulating investment through incorporation

Author

Listed:
  • Michael Devereux

    (Oxford University Centre for Business Taxations)

  • Li Liu

    (Oxford University Centre for Business Taxations)

Abstract

We examine the effect of incorporation in stimulating small business investment. Exploring a 2006 UK tax reform that lowered the tax gain to incorporation and reduced the after-tax internal funds for small companies, we present three main results. First, a one-percentage-point reduction in the tax gain decreased the number of new incorporations by 4.5 percent. Second, on average, a ¡ê 1 reduction in the post-tax internal funds of newly-incorporated firms would reduce their investment by 90 pence, consistent with them facing severe financial constraints. Third, this impact on investment gradually diminished after incorporation, consistent with incorporation improving access to external finance.

Suggested Citation

  • Michael Devereux & Li Liu, 2016. "Stimulating investment through incorporation," Working Papers 1607, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1607
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    References listed on IDEAS

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    7. Michael P. Devereux & Li Liu & Simon Loretz, 2014. "The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 19-53, May.
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    Cited by:

    1. Guceri, Irem & Albinowski, Maciej, 2019. "Investment Responses to Tax Policy under Uncertainty," MF Working Papers 34, Ministry of Finance in Poland.
    2. Tazhitdinova, Alisa, 2020. "Are changes of organizational form costly? Income shifting and business entry responses to taxes," Journal of Public Economics, Elsevier, vol. 186(C).

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