The paper shows how entrepreneurial taxes interact with the career choice of individuals, the quality of entrepreneurs, and their investment behavior. It is particularly relevant to differentiate the early effects on start-up enterprises with substantial uncertainty from the tax effects on mature firms where the uncertainty is resolved. Conditions are derived for the Nordic dual income tax to be neutral and they are found to be stringent. Profit expectations matter. The Nordic dual encourages (discourages) the establishment of new enterprises by entrepreneurs who anticipate high (low) profitability. JEL Classification: H25

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Abstract:The initial cost of equity of a foreign subsidiary, financed by its parent from abroad, and the opportunity cost of reinvesting its marginal foreign profits both depend on repatriation taxes. Only investments financed from intramarginal foreign profits are independent of repatriation taxes, but their cost of capital depends inversely on the dividend tax of the home-country parent's owners.We calibrate the cost of capital formulae to the Estonian and Finnish parameters of taxing international investment income. The calculations show that Estonian subsidiaries, which pay no tax on undistributed profits but a corporate dividend tax, offer tax benefits to their parents only in terms of intra-marginal profits.

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