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Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities can be Harmful

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  • Ralf Ewert
  • Rainer Niemann

Abstract

We examine the combined effects of asymmetric taxation and limited liability on optimal risk taking of investors. Given an optimal risk level in the pre-tax case under full liability, loss-offset restrictions reduce, and limited liability enhances the incentives for taking risk. For every degree of limited liability we can find corresponding loss-offset limitations inducing the same optimal risk level as in the reference case. Thereby we get tax neutrality with respect to risk taking. We show that tax neutrality with respect to risk taking is incompatible with tax neutrality with respect to the choice of the legal form. In our model, full liability requires symmetric taxation and limited liability requires asymmetric taxation of profits and losses.

Suggested Citation

  • Ralf Ewert & Rainer Niemann, 2010. "Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities can be Harmful," CESifo Working Paper Series 3301, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3301
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    References listed on IDEAS

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    Cited by:

    1. Lina Cui, 2013. "A Markov Chain Analysis on the Impact of German Tax Loss Offset Restrictions," Economic Papers, The Economic Society of Australia, vol. 32(1), pages 122-134, March.
    2. Rainer Niemann, 2011. "Asymmetric Taxation and Performance-Based Incentive Contracts," CESifo Working Paper Series 3363, CESifo Group Munich.

    More about this item

    Keywords

    limited liability; loss-offset; tax neutrality; risk taking;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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