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Economic Effects of Taxing Different Organizational Forms under a Dual Income Tax

Author

Listed:
  • Lindhe, Tobias

    (Swedish Ministry of Finance)

  • Södersten, Jan

    (Department of Economics)

  • Öberg, Ann

    (National Institute of Economic Research)

Abstract

This paper analyzes the economic effects of different income splitting rules for closely held corporations and sole proprietorships/partnerships in a tax system with a dual income tax. We conclude that the tax rules for closed corporations offer roughly the same cost of capital as for widely held corporations. Compared to corporate firms, the cost of capital is lower for sole proprietorships/partnerships, because the income-splitting rules both neutralize the impact of the high labor income tax and avoid the two-tier taxation on the corporate form of organization. Adding risk to the model shows that closely held corporations have a lower cost of capital than would be the case without income-splitting rules.

Suggested Citation

  • Lindhe, Tobias & Södersten, Jan & Öberg, Ann, 2003. "Economic Effects of Taxing Different Organizational Forms under a Dual Income Tax," Working Paper Series 2003:19, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uunewp:2003_019
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    File URL: http://www.nek.uu.se/pdf/wp2003_19.pdf
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    References listed on IDEAS

    as
    1. Kari, Seppo, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, VATT Institute for Economic Research.
    2. Karlsson, Charlie & Acs, Zoltan J, 2002. "Introduction to Institutions, Entrepreneurship and Firm Growth: The Case of Sweden," Small Business Economics, Springer, vol. 19(2), pages 63-67, September.
    3. Mikael Apel & Jan Södersten, 1999. "Personal Taxation and Investment Incentives in a Small Open Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(1), pages 79-88, February.
    4. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "Taxing Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-1.
    5. Roger H. Gordon & Jeffrey K. MacKie-Mason & R. Glenn Hubbard, 1995. "The Importance of Income Shifting to the Design and Analysis of Tax Policy," NBER Chapters, in: Taxing Multinational Corporations, pages 29-38, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Stenkula, Mikael & Wykman, Niklas, 2022. "The Taxation of Closely Held Firms: The Achilles Heel of the Dual Income Tax System Reconsidered," Working Paper Series 1434, Research Institute of Industrial Economics.
    2. Thomas Aronsson & Sören Blomquist, 2008. "Redistribution and Provision of Public Goods in an Economic Federation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 125-143, February.
    3. Sören Blomquist & Vidar Christiansen, 2008. "Taxation and Heterogeneous Preferences," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(2), pages 218-244, June.

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    More about this item

    Keywords

    Dual income taxation; small business taxation; tax avoidance; income splitting; cost of capital;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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