Working Paper: NBER ID: w3781
Authors: Jeffrey K. McKiemason; Roger H. Gordon
Abstract: One of the most basic distortions created by the double taxation of corporate income is the disincentive to incorporate. In this paper, we investigate the extent to which the aggregate allocation of assets and taxable income in the U.S. between corporate vs. noncorporate forms of organization during the period 1959-86 has responded to the size of the tax distortion discouraging firms from incorporating. In theory, profitable firms should shift out of the corporate sector when the tax distortion to incorporating is larger, and conversely for firms with tax losses. Our empirical results provide strong support for these theoretical forecasts, and hold consistently across a wide variety of specifications and measures of the tax variables. Measured effects are small, however, throwing doubt on the economic importance of tax-induced changes in organizational form.
Keywords: taxation; organizational form; corporate income tax
JEL Codes: H25; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax distortion to incorporating increases (H32) | profitable firms shift out of the corporate sector (D22) |
| tax distortion to incorporating increases (H32) | firms with tax losses may incorporate (H32) |
| cutting the tax rate on noncorporate income by 10% (H32) | shift of no more than 0.5% of total assets out of the corporate form (G39) |
| cutting the tax rate on noncorporate income by 10% (H32) | 5% shift towards more favored organizational forms (L20) |