Incorporation and Taxation: Theory and Firm-Level Evidence
University of St. Gallen, Economics Discussion Paper No. 2008-20
46 Pages Posted: 22 Oct 2008
Date Written: September 1, 2008
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: Suggested Citation