Working Paper: NBER ID: w27939
Authors: James R. Hines Jr.
Abstract: Higher corporate taxes reduce corporate business operations, replacing them with operations by noncorporate businesses that are risky and have undiversified ownership. This shift contributes to income dispersion, with effects so large that higher corporate taxes can increase income inequality even when the corporate tax burden falls entirely on capital owned disproportionately by the rich. Estimates suggest that the riskiness of U.S. noncorporate business increases by 12.3% the aggregate income of the top one percent, and that income dispersion created by a higher U.S. corporate tax rate offsets more than half of the distributional effects of reducing average returns to capital.
Keywords: Corporate Taxation; Income Distribution; Inequality
JEL Codes: D31; H22; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher corporate taxes (H29) | Reduce corporate business operations (G34) |
| Reduce corporate business operations (G34) | Increase noncorporate business activity (L20) |
| Increase noncorporate business activity (L20) | Greater income dispersion (D31) |
| Higher corporate taxes (H29) | Increase income inequality (D31) |
| Higher corporate taxes (H29) | Exacerbate income inequality (D31) |
| Higher corporate taxes (H29) | Shift towards noncorporate businesses (L39) |
| Shift towards noncorporate businesses (L39) | Higher risk profile (G19) |
| Higher risk profile (G19) | 123% increase in aggregate income of the top 1% (E25) |
| Higher corporate taxes (H29) | Offset distributional effects from reducing average capital returns (D39) |