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Personal Taxation, Portfolio Choice and The Effect of the Corporation Income Tax

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  • Martin 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0241.

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Date of creation: Nov 1980
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Publication status: published as Feldstein, Martin S. and Slemrod, Joel. "Personal Taxation, Portfolio Choice, and the Effect of the Corporation Income Tax." Journal of Political Economy, Vol. 88, No. 5, (Oct. 1980), pp. 854-866.
Handle: RePEc:nbr:nberwo:0241

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  1. Shoven, John B. & Whalley, John, 1972. "A general equilibrium calculation of the effects of differential taxation of income from capital in the U.S," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 281-321, November.
  2. Stiglitz, Joseph E, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 83(2), pages 263-83, May.
  3. Feldstein, Martin S, 1969. "The Effects on Taxation on Risk Taking," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 77(5), pages 755-64, Sept./Oct.
  4. Martin Feldstein & Lawrence H. Summers, 1979. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Working Papers 0312, National Bureau of Economic Research, Inc.
  5. Shoven, John B, 1976. "The Incidence and Efficiency Effects of Taxes on Income from Capital," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1261-83, December.
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Cited by:
  1. Roger H. Gordon & Jeffrey K. MacKie--Mason, 1994. "Tax Distortions to the Choice of Organizational Form," Public Economics, EconWPA 9401004, EconWPA, revised 18 Jan 1994.
  2. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1990. "Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form," NBER Working Papers 3222, National Bureau of Economic Research, Inc.
  3. Clemens Fuest & Bernd Huber & Søren Bo Nielsen, . "Why Is the Corporate Tax Rate Lower than the Personal Tax Rate?," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 00-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  4. Henrekson, Magnus & Johansson, Dan & Stenkula, Mikael, 2010. "Taxation, Labor Market Policy and High-Impact Entrepreneurship," Working Paper Series, Research Institute of Industrial Economics 826, Research Institute of Industrial Economics.
  5. Martin Feldstein, 1983. "Inflation, Tax Rules, and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 199-220 National Bureau of Economic Research, Inc.
  6. Romanov, Dmitri, 2006. "The corporation as a tax shelter: Evidence from recent Israeli tax changes," Journal of Public Economics, Elsevier, Elsevier, vol. 90(10-11), pages 1939-1954, November.
  7. Fuest, Clemens & Huber, Bernd & Nielsen, Soren B., 2003. "Why is the corporate tax rate lower than the personal tax rate?: The role of new firms," Journal of Public Economics, Elsevier, Elsevier, vol. 87(1), pages 157-174, January.
  8. Martin Feldstein, 1987. "Imputing Corporate Tax Liabilities to Individual Taxpayers," NBER Working Papers 2349, National Bureau of Economic Research, Inc.
  9. Césaire Assah Meh, 2002. "Entrepreneurial Risk, Credit Constraints, and the Corporate Income Tax: A Quantitative Exploration," Working Papers, Bank of Canada 02-21, Bank of Canada.
  10. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc.
  11. Cullen, Julie Berry & Gordon, Roger H., 2007. "Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1479-1505, August.
  12. Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," Scholarly Articles 3204679, Harvard University Department of Economics.
  13. Joel Slemrod, 1981. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Working Papers 0799, National Bureau of Economic Research, Inc.
  14. Roger H. Gordon & Julie Berry Cullen, 2002. "Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S," NBER Working Papers 9015, National Bureau of Economic Research, Inc.
  15. Douhan, Robin & Henrekson, Magnus, 2007. "The Political Economy of Entrepreneurship," Working Paper Series, Research Institute of Industrial Economics 716, Research Institute of Industrial Economics.

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