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Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship

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  • Vesa Kanniainen
  • Paolo M. Panteghini

Abstract

The theoretical work on capital income taxation has focused on conditions under which a tax system preserves investment neutrality. The trouble with such a neutrality view is that it is focused on one margin among others. The economics of start-up firms is, however, fundamentally different from the economics of established corporations. In particular, the opportunity cost of an entrepreneur should be stated in terms of forgone earnings in the labor market, adjusted for the option value of abandoning the firm throughout the lifetime. Moreover, the future-exit option interferes with the early start-up decision when a nascent entrepreneur is forward-looking. The paper shows that the requirement of start-up neutrality is not satisfied by any of the well-known investment-neutral tax systems, including the comprehensive income tax, the dividend tax, the Johansson-Samuelson tax, the cash-flow tax, and the ACE tax.

Suggested Citation

  • Vesa Kanniainen & Paolo M. Panteghini, 2013. "Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(2), pages 167-193, June.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201206)69:2_167:tniort_2.0.tx_2-v
    DOI: 10.1628/001522108X666926
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    2. Robin Boadway & Motohiro Sato & Jean-Francois Tremblay, 2015. "Cash-flow business taxation revisited: bankruptcy, risk aversion and asymmetric information," Working Papers 1531, Oxford University Centre for Business Taxation.
    3. repec:prg:jnlcfu:v:2021:y:2021:i:4:id:566 is not listed on IDEAS
    4. Alessandro Fedele & Paolo M. Panteghini & Sergio Vergalli, 2011. "Optimal Investment and Financial Strategies under Tax‐Rate Uncertainty," German Economic Review, Verein für Socialpolitik, vol. 12(4), pages 438-468, November.
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    6. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    7. Gerasimos T SOLDATOS, 2015. "Indirect Tax Incidence under Inelastic Underground Economy Demand," Journal of Economics and Behavioral Studies, AMH International, vol. 7(3), pages 56-62.
    8. Del Boca, Alessandra & Fratianni, Michele & Spinelli, Franco & Trecroci, Carmine, 2010. "The Phillips curve and the Italian lira, 1861-1998," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 182-197, August.
    9. Soldatos, Gerasimos, 2014. "Indirect Tax Incidence under Inelastic Underground Economy Demand," MPRA Paper 64598, University Library of Munich, Germany.
    10. Henrekson, Magnus & Sanandaji, Tino, 2016. "Owner-Level Taxes and Business Activity," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 12(1), pages 1-94, March.
    11. Magnus Henrekson & Tino Sanandaji, 2018. "Stock option taxation: a missing piece in European innovation policy?," Small Business Economics, Springer, vol. 51(2), pages 411-424, August.
    12. Alessandro Fedele & Raffaele Miniaci, 2010. "Do Social Enterprises Finance Their Investments Differently from For-profit Firms? The Case of Social Residential Services in Italy," Journal of Social Entrepreneurship, Taylor & Francis Journals, vol. 1(2), pages 174-189, October.
    13. Andrea Asoni & Tino Sanandaji, 2014. "Taxation and the quality of entrepreneurship," Journal of Economics, Springer, vol. 113(2), pages 101-123, October.
    14. Savina Finardi & Anna Melicharová, 2021. "Impact of Svarc system on Tax Revenues in the Czech Republic [Dopad švarcsystému na daňové příjmy v České repubice]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2021(4), pages 19-29.
    15. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 257-280, February.
    16. Henrekson, Magnus & Sanandaji, Tino, 2016. "Stock Option Taxation and Venture Capital Activity: A Cross-Country Comparison," Working Paper Series 1104, Research Institute of Industrial Economics, revised 09 Nov 2017.
    17. Rosella Levaggi & Francesco Menoncin, 2009. "Decentralized provision of merit and impure public goods," Working Papers 0909, University of Brescia, Department of Economics.
    18. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
    19. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains Taxation in the Real World," CESifo Working Paper Series 2674, CESifo.
    20. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers 0913, University of Brescia, Department of Economics.

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    More about this item

    Keywords

    entrepreneurship; start-up neutrality; ACE tax; cash-flow tax; dividend tax; Johansson-Samuelson theorem; real options;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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