Working Paper Series
Taxation of Entrepreneurs Relative to Well Diversified Investors - A Swedish Perspective
Abstract: The paper argues that cost of capital comparisons across
closely held companies and entrepreneurial ventures on the one hand and
widely held companies on the other, ought not to be based on an equal level
assumption regarding the investors’ required rates of return, net of taxes.
Theoretical considerations as well as empirical evidence show that the
return requirements are much higher on investments by entrepreneurs in
venture startups than on those by well diversified investors. Using earlier
results based on the capital asset pricing model (CAPM), it is shown that
the difference can be as high as a factor three. Given these circumstances,
the paper concludes that by more or less neglecting this difference, the
Swedish dual income tax system heavily discriminates against
entrepreneurship and growth of small firms. This should be a lesson to
other countries considering the mitigation of effects of capital mobility
by a dual income tax, i.e. by using standardized measures of the amount of
capital income to be taxed at lower rates than labour.
Keywords: Tax Neutrality; Entrepreneurship; Dual Income Taxation; Cost of Capital; (follow links to similar papers)
JEL-Codes: G32; H25; H32; (follow links to similar papers)
22 pages, October 30, 2004
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