Incorporation and Taxation: Theory and Firm-Level Evidence
Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research
University of St. Gallen - Department of Economics (FGN-HSG); Institute for Advanced Studies (IAS); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)
University of Salzburg - Department of Economics and Social Sciences; Austrian Institute of Economic Research (WIFO); University of Oxford - Oxford University Centre for Business Taxation; University of Innsbruck - Department of Economics & Statistics
CESifo Working Paper Series No. 2685
This paper provides a theory and firm-level evidence on the incorporation decision of entrepreneurs in a model of taxes and corporate governance. The theory explains how the incorporation decision of entrepreneurs is driven by taxation (corporate and personal income taxes), corporate transparency, access to external capital and limited liability. We estimate features of this model using a large cross-section of more than 540, 000 firms in European manufacturing. We find that higher personal income tax rates favor incorporation while higher corporate tax rates reduce the probability to incorporate. These findings are robust to the inclusion of other economic and institutional determinants of external financing and choice of organizational form.
Number of Pages in PDF File: 48
Keywords: incorporation, governance, taxes, discrete choice models
JEL Classification: H25, H73, F23, C21working papers series
Date posted: July 6, 2009
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