Incorporation and Taxation: Theory and Firm-Level Evidence

48 Pages Posted: 6 Jul 2009

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: June 2009

Abstract

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.

Keywords: incorporation, governance, taxes, discrete choice models

JEL Classification: H25, H73, F23, C21

Suggested Citation

Egger, Peter H. and Keuschnigg, Christian and Winner, Hannes, Incorporation and Taxation: Theory and Firm-Level Evidence (June 2009). CESifo Working Paper Series No. 2685. Available at SSRN: https://ssrn.com/abstract=1428774

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)

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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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