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Stimulating investment through incorporation

Michael Devereux () and Li Liu
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Michael Devereux: Oxford University Centre for Business Taxations

Authors registered in the RePEc Author Service: Michael P. Devereux () and Michael B. Devereux ()

No 1607, Working Papers from Oxford University Centre for Business Taxation

Abstract: We examine the effect of incorporation in stimulating small business investment. Exploring a 2006 UK tax reform that lowered the tax gain to incorporation and reduced the after-tax internal funds for small companies, we present three main results. First, a one-percentage-point reduction in the tax gain decreased the number of new incorporations by 4.5 percent. Second, on average, a ¡ê 1 reduction in the post-tax internal funds of newly-incorporated firms would reduce their investment by 90 pence, consistent with them facing severe financial constraints. Third, this impact on investment gradually diminished after incorporation, consistent with incorporation improving access to external finance.

New Economics Papers: this item is included in nep-acc
Date: 2016
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