Should Continued Family Firms Face Lower Taxes than Other Estates?

Leibniz Universitat Hannover Discussion Paper No. 387

46 Pages Posted: 15 Feb 2008 Last revised: 22 Feb 2009

See all articles by Volker Grossmann

Volker Grossmann

University of Fribourg - Faculty of Economics and Social Science; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Holger Strulik

University of Goettingen (Göttingen) - School of Law, Economics, Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: January 2009

Abstract

Inheritance taxes may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the targeted persons, i.e., the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.

Keywords: Bequest Taxation, Creative Destruction, Entrepreneurship, Family Firms, Preferential Tax Treatment

JEL Classification: H25, L26, J24

Suggested Citation

Grossmann, Volker and Strulik, Holger, Should Continued Family Firms Face Lower Taxes than Other Estates? (January 2009). Leibniz Universitat Hannover Discussion Paper No. 387, Available at SSRN: https://ssrn.com/abstract=1093310 or http://dx.doi.org/10.2139/ssrn.1093310

Volker Grossmann (Contact Author)

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Holger Strulik

University of Goettingen (Göttingen) - School of Law, Economics, Social Sciences ( email )

Germany

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