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Should continued family firms face lower taxes than other estates?

Volker Grossmann () and Holger Strulik ()

Journal of Public Economics, 2010, vol. 94, issue 1-2, 87-101

Abstract: Taxes on estates and inheritances 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 descendants of less able entrepreneurs who were caused by continuation-friendly tax policy to keep a family business always lose relative to their status in an economy without such a policy.

Keywords: Bequest; taxation; Creative; destruction; Entrepreneurship; Family; firms; Preferential; tax; treatment (search for similar items in EconPapers)
Date: 2010
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Working Paper: Should Continued Family Firms Face Lower Taxes than other Estates? (2008) Downloads
Working Paper: Should Continued Family Firms Face Lower Taxes Than Other Estates? (2008) Downloads
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