Working Paper: NBER ID: w0241
Authors: Martin S. Feldstein; Joel Slemrod
Abstract: Extending the traditional treatment of the corporate tax to an economy with a progressive personal tax fundamentally changes the analysis. While the corporate tax system (CTS) does increase the total tax rate on corporate source income for some investors, the exclusion of retained earnings implies that the CTS lowers the tax rate for high-income investors. Analyzing such an economy requires replacing the traditional "equal-yield" equilibrium condition with a more general portfolio balance model. In this model, introducing a CTS can actually increase the corporate share of the capital stock even though the relative tax rate on corporate income rises.
Keywords: corporate income tax; personal taxation; portfolio choice; capital allocation
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate income tax system (H24) | increase fraction of capital stock employed in corporate sector (G31) |
| Retained earnings taxed at lower rate (H32) | incentivizes high-income investors to invest more in corporate assets (G31) |
| Corporate tax system lowers after-tax yield on corporate income for high-income investors (H32) | potentially increases their investment in corporations (G30) |
| Corporate tax system raises effective tax rate for low-income investors (H29) | decrease in their corporate investment (G31) |
| Relative responsiveness of high-income investors to after-tax yield differentials (H31) | net effect on overall capital allocation (G31) |