Should continued family firms face lower taxes than other estates?
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.
Year of publication: |
2010
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Authors: | Grossmann, Volker ; Strulik, Holger |
Published in: |
Journal of Public Economics. - Elsevier, ISSN 0047-2727. - Vol. 94.2010, 1-2, p. 87-101
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Publisher: |
Elsevier |
Keywords: | Bequest taxation Creative destruction Entrepreneurship Family firms Preferential tax treatment |
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