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A Theory of Taxation and Incorporation

Christian Keuschnigg, Peter Egger () and Hannes Winner ()

University of St. Gallen Department of Economics working paper series 2010 from Department of Economics, University of St. Gallen

Abstract: This paper provides a theory of incorporation and taxation that emphasizes the role of the corporate legal form in facilitating access to external capital and the potential advantages of limited liability. Incorporation relaxes financing constraints and makes corporations larger than comparable non-corporate firms. For the same reason, a tax on corporations imposes a smaller first order welfare loss than a tax on non-corporate firms. Shifting the tax burden from non-corporate to corporate firms raises welfare, justifying some double taxation of corporate profits under a classical system. We compare the role of taxes with other institutional reforms and discuss how the theoretical results of the paper can be tested empirically.

Keywords: Incorporation; corporate tax; external capital; limited liability (search for similar items in EconPapers)
JEL-codes: H25 H73 F23 C21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-bec, nep-pbe and nep-pub
Date: 2010-08
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