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1-s2.0-s0047272709001200-main
Journal article

Should continued family firms face lower taxes than other estates?

BP2-STS

  • 2010
Published in:
  • Journal of Public Economics. - Elsevier BV. - 2010, vol. 94, no. 1-2, p. 87-101
Bequest taxation
Creative destruction
Entrepreneurship
Family firms
Preferential tax treatment
Finance
Economics and Econometrics
English Taxes on estates and inheritances may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the descendants of less able entrepreneurs who were caused by continuation-friendly tax policy to keep a family business always lose relative to their status in an economy without such a policy.
Faculty
Faculté des sciences économiques et sociales et du management
Department
Département d'économie politique
Language
  • English
Classification
Economics
License
Rights reserved
Open access status
green
Identifiers
Persistent URL
https://folia.unifr.ch/unifr/documents/323613
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