Economic Effects of Taxing Different Organizational Forms under a Dual Income Tax
This paper analyzes the economic effects of different income splitting rules for closely held corporations and sole proprietorships/partnerships in a tax system with a dual income tax. We conclude that the tax rules for closed corporations offer roughly the same cost of capital as for widely held corporations. Compared to corporate firms, the cost of capital is lower for sole proprietorships/partnerships, because the income-splitting rules both neutralize the impact of the high labor income tax and avoid the two-tier taxation on the corporate form of organization. Adding risk to the model shows that closely held corporations have a lower cost of capital than would be the case without income-splitting rules.
|Date of creation:||15 Jul 2003|
|Date of revision:|
|Publication status:||Published in International Tax and Public Finance, 2004, pages 469-485.|
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- Roger H. Gordon & Jeffrey K. MacKie-Mason & R. Glenn Hubbard, 1995. "The Importance of Income Shifting to the Design and Analysis of Tax Policy," NBER Chapters, in: Taxing Multinational Corporations, pages 29-38 National Bureau of Economic Research, Inc.
- Karlsson, Charlie & Acs, Zoltan J, 2002. " Introduction to Institutions, Entrepreneurship and Firm Growth: The Case of Sweden," Small Business Economics, Springer, vol. 19(2), pages 63-67, September.
- Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "Taxing Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-1, December.
- Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
- Mikael Apel & Jan Södersten, 1999. "Personal Taxation and Investment Incentives in a Small Open Economy," International Tax and Public Finance, Springer, vol. 6(1), pages 79-88, February.
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