Niels Blomgren-Hansen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Abstract: As a main principle, income is taxed when earned. This principle is
broken in case of unrealized capital gains (recovered depreciations, unrecorded
intangible assets etc.). Such incomes are taxed when realized or the ‘latent tax’ is
passed on to the new owner (tax succession). In Denmark, tax succession is
allowed only if the new owner is a close relative to the previous owner. However,
recently it has been proposed to extend the access to tax succession to a wider
group of potential purchasers as a means of facilitating generational chances in
small and medium sized firms. One argument is that taxation of capital gains gives
the previous owner an incentive to delay the generational change longer than
appropriate from an efficiency point of view (the ‘lock-in’ effect). Sections 2 and 3
analyse, within a very simple framework, the impact of tax succession on the price
of a firm, the after-tax revenue to the previous owner, and the tax proceeds. The
conclusion is that tax succession has significant effects on before-tax and after-tax
prices and that the associated indirect tax subsidy is an appreciable expenditure.
Sections 4 and 5 address the problem of efficiency losses from tax succession and
‘lock-in. The conclusion is that, most probably, the former efficiency loss out-weighs
the latter one, in particular, if the rules are discriminatory giving the
previous owner an incentive to choose a less efficient purchaser who are allowed
to succeed rather than a more efficient one who is not.
24 pages, March 1, 1999
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