Incorporation and Taxation: Theory and Firm-Level Evidence

University of St. Gallen, Economics Discussion Paper No. 2008-20

46 Pages Posted: 22 Oct 2008

See all articles by Peter H. Egger

Peter H. Egger

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

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Hannes Winner

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

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Date Written: September 1, 2008

Abstract

This paper provides theory and firm-level evidence on the incorporation decision of entrepreneurs in a model of corporate governance and taxation. 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. The impact of taxation on the incorporation decision is at the heart of this analysis. We find that higher personal income tax rates and their progression are associated with an increase in the probability of incorporation, while higher corporate tax rates entail an impediment to incorporate. This finding is robust to the inclusion of other economic and institutional determinants and to a variety of functional form assumptions about the latent variable in the estimated discrete choice model.

Keywords: Incorporation, governance, taxes, discrete choice models

JEL Classification: H25, H73, F23, G34, C21

Suggested Citation

Egger, Peter H. and Keuschnigg, Christian and Winner, Hannes, Incorporation and Taxation: Theory and Firm-Level Evidence (September 1, 2008). University of St. Gallen, Economics Discussion Paper No. 2008-20. Available at SSRN: https://ssrn.com/abstract=1288025 or http://dx.doi.org/10.2139/ssrn.1288025

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

Poschingerstr. 5
Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

HOME PAGE: http://www.cesifo-group.de/portal/page?_pageid=36,425628&_dad=portal&_schema=PORTAL

Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Poschinger Str. 5
Munich, DE-81679
Germany

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Hannes Winner

University of Salzburg - Department of Economics and Social Sciences ( email )

Residenzplatz9
Salzburg, 5010
Austria

Austrian Institute of Economic Research (WIFO) ( email )

P.O. Box 91
Wien, A-1103
Austria

University of Oxford - Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

University of Innsbruck - Department of Economics & Statistics ( email )

Universitatsstrasse 15
Innsbruck, A-6020
Austria

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