Entrepreneurial Risk, Credit Constraints, and the Corporate Income Tax
- Topics:
- Taxes
- Tags:
- Bank Of Canada,
- Taxes,
- Management,
- Liquidity,
- Investment,
- Income Tax,
- Income,
- Financial Planning,
- Finance,
- Entrepreneurship,
- ...
- Source:
- Bank of Canada
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Overview: This paper describes the positive effect that corporate income tax has on capital formation in the presence of liquidity constraints and uninsurable risk. The author uses a dynamic general-equilibrium model in which individuals choose whether to become entrepreneurs or workers. Workers save by holding corporate equity and therefore are subject to double taxation, as the return on their savings is taxed at both the corporate and personal level. Entrepreneurs, on the other hand, save by investing in their businesses and are taxed only at the personal level. This differential tax treatment results in an increase in capital accumulation because entrepreneurs must save in response to liquidity constraints and uninsurable risk. Consequently, the stock of capital decreases, since entrepreneurs have a higher marginal rate of saving than workers, as they save not only for life-cycle motives but to self-insure against business risk and to start and finance their businesses.
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Format: PDF | Size: 333KB | Date: Aug 2002 | Pages: 48
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