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Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?

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  • Roger H. Gordon
  • Joel Slemrod

Abstract

Two well-noted phenomena of recent decades are the increasing concentration of personal income and the declining rate of corporate profitability. This paper investigates to what extent these two trends have a common explanation extent these two trends have a common explanation-shifting of income to the personal tax base from the corporate tax base caused by the generally declining difference between personal tax rates and corporation income tax rates. This paper presents evidence that a substantial amount of income shifting has in fact occured since 1965, based on time-series regression analyses that reveal that an increase in corporate tax rates relative to personal rates resulted in an increase in reported personal income and a drop in reported corporate income, even after controlling for corproate use of debt finance and for the amount of corporate assets. We focus on one mechanism for shifting--changing the form of compensation for executives and other workers, such as between wage compensation and greater use of stock options. The potential importance of income shifting requires a reinterpretation of both the efficiency and distributional consequences of of changes in the tax structure.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6576.

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Date of creation: May 1998
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Publication status: published as Slemrod, J. (ed.) Does Atlas Shrug? The Economic Consequences of Taxing the Rich. Cambridge: Harvard University Press, 2002.
Handle: RePEc:nbr:nberwo:6576

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  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.
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  6. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  7. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, American Finance Association, vol. 39(3), pages 575-92, July.
  8. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. Alan J. Auerbach & James M. Poterba, 1987. "Why Have Corporate Tax Revenues Declined?," NBER Working Papers 2118, National Bureau of Economic Research, Inc.
  10. Daniel R. Feenberg & James M. Poterba, 1993. "Income Inequality and the Incomes of Very High-Income Taxpayers: Evidence from Tax Returns," NBER Chapters, in: Tax Policy and the Economy, Volume 7, pages 145-177 National Bureau of Economic Research, Inc.
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  14. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 89-130 National Bureau of Economic Research, Inc.
  15. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 215.
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  20. Martin Feldstein & Joel Slemrod, 1980. "Personal Taxation, Portfolio Choice and The Effect of the Corporation Income Tax," NBER Working Papers 0241, National Bureau of Economic Research, Inc.
  21. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(2), pages 187-221, June.
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  24. Lawrence B. Lindsey, 1981. "Is the Maximum Tax on Earned Income Effective?," NBER Working Papers 0613, National Bureau of Economic Research, Inc.
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