Working Paper: NBER ID: w11469
Authors: Mihir A. Desai; Dhammika Dharmapala; Winnie Fung
Abstract: Legal rules, politics and behavioral factors have all been emphasized as explanatory factors in analyses of the determinants of the concentration of corporate ownership and stock market participation. An extension of standard tax clientele arguments demonstrates that changes in the progressivity of taxes can also significantly influence patterns of equity ownership. A novel index of the concentration of corporate ownership over the twentieth century in the U.S. provides the opportunity to quantitatively test for the role of taxes in shaping ownership concentration. The index of ownership concentration is characterized by considerable time series variation, with significant diffusion of ownership in the post WWII era and reconcentration in the late 1990s. Analysis of this index indicates that the progressivity of taxation significantly influences corporate ownership concentration and equity market participation as predicted by the model. This evidence supports the intuition of Berle and Means (1932) that taxation can significantly influence patterns of equity ownership.
Keywords: corporate ownership; taxation; equity market participation
JEL Codes: G30; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increases in the progressivity of personal income tax rates (H29) | Greater diffusion of stock ownership across the income distribution (G59) |
| Increases in the progressivity of individual income tax rates (H31) | Decrease in corporate ownership concentration (G34) |
| Increases in tax progressivity (H29) | Increase in equity issuance by firms (G32) |
| Increase in equity issuance by firms (G32) | Greater diffusion of equity ownership among lower-income investors (G59) |
| Tax progressivity (H29) | Impact on equity market participation among lower-income groups (F61) |