Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2003:19: Economic Effects of Taxing Different Organizational Forms under a Dual Income Tax

Tobias Lindhe , Jan Södersten () and Ann Öberg ()
Additional contact information
Tobias Lindhe: Swedish Ministry of Finance, Postal: SE-103 33 Stockholm, Sweden
Jan Södersten: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Ann Öberg: National Institute of Economic Research, Postal: Box 3116, SE-103 62 Stockholm, Sweden

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.

Keywords: Dual income taxation; small business taxation; tax avoidance; income splitting; cost of capital

JEL-codes: H24; H25; H32

22 pages, July 15, 2003

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