A note on corporate taxation, limited liability, and asymmetric information

Becker and Fuest (this issue, p. 1-10) provides a new explanation for the link between limited liability and corporate taxation. The authors argue that a corporate tax on all entrepreneurs with limited liability is optimal when entrepreneurs can offset potential losses and when asymmetric information exists regarding projects' qualities. This note considers a model with a slightly modified production technology. It confirms that entrepreneurs' abilities to offset losses and the existence of asymmetric information may affect government policy. However, it also shows that the optimal taxation policy differs from that suggested by Becker and Fuest.