How Does the Estate Tax Affect the Number of Firms?
Journal of Entrepreneurship and Public Policy, 3(1): 96-117, 2014
37 Pages Posted: 12 Aug 2015
Date Written: November 30, 2012
This study estimates the effect of the combined (Federal and state) estate, inheritance, and gift (EIG) tax burden per decedent on the number of firms in the United States. Estimates are based on a longitudinal panel of 50 American states from 1988 to 2006. We find that the growth in the EIG tax burden per decedent significantly reduces the growth in the number of firms, especially small firms. The higher dissolution rate among small firms can be attributed to the asymmetric liquidity effect, which limits the ability of small business owners to raise the funds needed to pay the estate tax without liquidating their estates. Our estimates suggest that the reductions in EIG taxes, brought about by the passage of 2001 EGTRRA, have lead to a higher growth in the number of firms, ceteris paribus.
Keywords: estate, inheritance, gift, tax, asymmetric liquidity, entrepreneurship, dissolution, firm, small business
JEL Classification: C23, H21, H24, H25, H30, H71
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