Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities Can Be Harmful

31 Pages Posted: 18 Jan 2011

See all articles by Ralf Ewert

Ralf Ewert

University of Graz - Institute of Accounting and Auditing

Rainer Niemann

University of Graz, Center for Accounting Research; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: December 30, 2010

Abstract

We examine the combined effects of asymmetric taxation and limited liability on optimal risk taking of investors. Given an optimal risk level in the pre-tax case under full liability, loss-offset restrictions reduce, and limited liability enhances the incentives for taking risk. For every degree of limited liability we can find corresponding loss-offset limitations inducing the same optimal risk level as in the reference case. Thereby we get tax neutrality with respect to risk taking. We show that tax neutrality with respect to risk taking is incompatible with tax neutrality with respect to the choice of the legal form. In our model, full liability requires symmetric taxation and limited liability requires asymmetric taxation of profits and losses.

Keywords: limited liability, loss-offset, tax neutrality, risk taking

JEL Classification: H25, M41

Suggested Citation

Ewert, Ralf and Niemann, Rainer, Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities Can Be Harmful (December 30, 2010). CESifo Working Paper Series No. 3301, Available at SSRN: https://ssrn.com/abstract=1742740 or http://dx.doi.org/10.2139/ssrn.1742740

Ralf Ewert

University of Graz - Institute of Accounting and Auditing ( email )

Universitaetsstr. 15/F1
Graz, A-8010
Austria
+43 (0) 316 380-3470 (Phone)
+43 (0) 316 380-9540 (Fax)

HOME PAGE: http://www.uni-graz.at/iuwp/

Rainer Niemann (Contact Author)

University of Graz, Center for Accounting Research ( email )

Universitätsstr. 15 / G2
Graz, 8010
Austria
+43-316-380-6444 (Phone)
+43-316-380-9595 (Fax)

HOME PAGE: http://www.uni-graz.at/steuer

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
104
Abstract Views
1,447
Rank
466,484
PlumX Metrics