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Corporate Income Tax, Legal Form of Organization, and Employment

Author

Listed:
  • 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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    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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