Why is there corporate taxation ? The role of limited liability revisited

Becker J, Fuest C

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.

Keywords
corporate taxation limited liability


Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
Published

Year
2007

Journal
Journal of Economics

Volume
92

Issue
1

Start page
1

End page
10

Language
English

ISSN
0931-8658