Why is there Corporate Taxation? The Role of Limited Liability Revisited |
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Authors: | Johannes Becker Clemens Fuest |
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Institution: | (1) Cologne Center for Public Economics, University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany |
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Abstract: | Most economists reject the idea that corporate taxation should be interpreted as a price for the privilege of limited liability.
In this paper, we reconsider this idea and show that limited liability can lead to overinvestment if information is incomplete.
In this setting, introducing an additional tax on limited liability contracts is welfare-enhancing. Our model thus offers
an explanation for the nexus between double taxation and limited liability observed in many existing tax systems.
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Keywords: | corporate taxation limited liability |
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