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Corporate Income Tax, Legal Form of Organization, and Employment

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  • Daphne Chen
  • Shi Qi
  • Don Schlagenhauf

Abstract

A dynamic stochastic occupational choice model with heterogeneous agents is developed to evaluate the impact of a corporate income tax reduction on employment. In this framework, the key margin is the endogenous entrepreneurial choice of legal form of organization. A reduction in the corporate income tax burden encourages adoption of the C corporation legal form, which reduces capital constraints on firms. Improved capital reallocation increases overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the non-employment rate by up to 7 percent.

Suggested Citation

  • Daphne Chen & Shi Qi & Don Schlagenhauf, 2018. "Corporate Income Tax, Legal Form of Organization, and Employment," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(4), pages 270-304, October.
    • Handle: RePEc:aea:aejmac:v:10:y:2018:i:4:p:270-304
    Note: DOI: 10.1257/mac.20140103
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    9. Benjamin Pugsley & Sebastian Dyrda, 2017. "Taxes, Regulations of Businesses and Evolution of Income Inequality in the US," 2017 Meeting Papers 1463, Society for Economic Dynamics.
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    13. Deng, Guoying & Du, Pengcheng & Hernandez, Manuel A. & Xu, Shu, 2024. "Corporate taxes and labor market informality evidence from China," IFPRI discussion papers 2244, International Food Policy Research Institute (IFPRI).
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    17. Qi, Shi & Schlagenhauf, Don, 2021. "The Kansas tax experiment: The matter of legal form of organization," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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