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Should Continued Family Firms Face Lower Taxes Than Other Estates?

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  • Grossmann, Volker
  • Strulik, Holger
Abstract
Inheritance taxes 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 targeted persons, i.e. the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.

Suggested Citation

  • Grossmann, Volker & Strulik, Holger, 2008. "Should Continued Family Firms Face Lower Taxes Than Other Estates?," Hannover Economic Papers (HEP) dp-387, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-387
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    References listed on IDEAS

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    Cited by:

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    2. Wojciech Kopczuk, 2012. "Taxation of Intergenerational Transfers and Wealth," NBER Working Papers 18584, National Bureau of Economic Research, Inc.
    3. Block, Joern H. & Hirschmann, Mirko & Kranz, Tobias & Neuenkirch, Matthias, 2023. "Public family firms and economic inequality across societies," Journal of Business Venturing Insights, Elsevier, vol. 19(C).
    4. Stefan Bach, 2016. "Erbschaftsteuer, Vermögensteuer oder Kapitaleinkommensteuer: Wie sollen hohe Vermögen stärker besteuert werden?," Discussion Papers of DIW Berlin 1619, DIW Berlin, German Institute for Economic Research.
    5. Andreas THIEMANN & Diana OGNYANOVA & Edlira NARAZANI & Balazs PALVOLGYI & Athena Kalyva & Alexander LEODOLTER, 2021. "Shifting the Tax Burden away from Labour towards Inheritances and Gifts – Simulation results for Germany," JRC Working Papers on Taxation & Structural Reforms 2021-16, Joint Research Centre.
    6. Grossmann, Volker & Strulik, Holger, 2010. "Should continued family firms face lower taxes than other estates?," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 87-101, February.
    7. James R. Hines & Niklas Potrafke & Marina Riem & Christoph Schinke, 2019. "Inter vivos transfers of ownership in family firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(2), pages 225-256, April.
    8. Florian Dorn & Björn Kauder & Manuela Krause & Niklas Potrafke, 2017. "Die Erbschaftsteuer in Deutschland – Reformbedarf und Reformkompromiss," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(01), pages 33-40, January.
    9. Lindner, Ines & Strulik, Holger, 2014. "From tradition to modernity: Economic growth in a small world," Journal of Development Economics, Elsevier, vol. 109(C), pages 17-29.
    10. Johann K. Brunner, 2012. "The Bequest Tax as Long-Term Care Insurance," CESifo Working Paper Series 3901, CESifo.
    11. Houben, Henriette & Maiterth, Ralf, 2009. "Inheritance tax-exempt transfer of German businesses: Imperative or unjustified subsidy? An empirical analysis," arqus Discussion Papers in Quantitative Tax Research 95, arqus - Arbeitskreis Quantitative Steuerlehre.
    12. Brunner Johann K., 2014. "Die Erbschaftsteuer – Bestandteil eines optimalen Steuersystems?," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 15(3), pages 199-218, October.
    13. Aina, Carmen & Nicoletti, Cheti, 2018. "The intergenerational transmission of liberal professions," Labour Economics, Elsevier, vol. 51(C), pages 108-120.
    14. Philipp Krug & Dominika Langenmayr, 2024. "Taxing Transitions: Inheritance Tax and Family Firm Succession," Working Papers 233, Bavarian Graduate Program in Economics (BGPE).
    15. Bierbrauer Felix J., 2016. "Effizienz oder Gerechtigkeit?: Ungleiche Einkommen, ungleiche Vermögen und Optimale Steuern," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(1), pages 2-24, April.
    16. Margit Schratzenstaller, 2023. "Behavioral Responses to Inheritance Taxation. A Review of the Empirical Literature," WIFO Working Papers 668, WIFO.
    17. Felix Bierbrauer, 2016. "Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_03, Max Planck Institute for Research on Collective Goods.

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    More about this item

    Keywords

    Bequest Taxation; Creative Destruction; Entrepreneurship; Family Firms; Preferential Tax Treatment.;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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