NCPA - National Center for Policy Analysis

The Effect of Succession Taxes on the Family Business

July 13, 2015

Demographic trends in both the United States and Europe make firm succession planning (where firms prepare employees to fill future key roles in the company) increasingly important for privately held family businesses. Each year, an estimated 690,000 firms providing 2.8 million jobs change hands in the European Union.

Succession taxes or inheritance taxes, which are incurred during business transfers and are sometimes referred to as transfer taxes, have been at the center of debate.

Using a natural experiment in Greece in 2002 where succession taxes fell from 20 percent to less than 2.4 percent, author Margarita Tsoutsoura with Chicago Booth found:

  • In the presence of higher succession taxes investment declined by 40 percent after the transfer of the business      to a new owner.
  • Investment declined more sharply for firms owned by people with little to no income from other sources.
  • Family firms experienced a decline in profitability and sales growth when succession taxes were higher.
  • Succession taxes affect firm boundaries by impacting the decision of whether to sell or keep the firm within the      family. Specifically reducing succession taxes led to a 60% increase in family transitions.

The results of the paper provide direct, new evidence that succession taxes can significantly influence firm behavior and investment decisions.

Source: Margarita Tsoutsoura, "The Effect of Succession Taxes on Family Firm Investment: Evidence from a Natural Experiment," The Journal of Finance, April 2015.

 

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