Should Continued Family Firms Face Lower Taxes than other Estates?
Holger Strulik () and
Volker Grossmann ()
No 2235, CESifo Working Paper Series from CESifo Group Munich
Inheritance taxes 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 targeted persons, i.e. the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.
Keywords: bequest taxation; creative destruction; entrepreneurship; family firms; preferential tax treatment (search for similar items in EconPapers)
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Journal Article: Should continued family firms face lower taxes than other estates? (2010)
Working Paper: Should Continued Family Firms Face Lower Taxes Than Other Estates? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2235
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