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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Webb D. and Meza D. (1987). Too Much Investment: A Problem of Asymmetric Information. Quarterly Journal of Economics 102: 281–292
John, K., Nair, V. B., and Senbet, L. (2005): “Law, Organizational Form and Taxes: A Stakeholder Perspective.” Working paper.
John, K., Senbet, L., and Sundaram, A. K. (1994): “Corporate Limited Liability and the Design of Corporate Taxation.” Working paper.
Meade J. E. (1978). The Structure and Reform of Direct Taxation – the Meade Report. Allen and Unwin, Boston
Mintz J. (1995). The Corporation Tax: A Survey. Fiscal Studies 16: 23–68
Musgrave R. A. and Musgrave P. B. (1980). Public Finance in Theory and Practice. McGraw-Hill, Tokyo
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Becker, J., Fuest, C. Why is there Corporate Taxation? The Role of Limited Liability Revisited. J Econ 92, 1–10 (2007). https://doi.org/10.1007/s00712-006-0240-4
Received:
Revised:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00712-006-0240-4