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What Does the Corporate Income Tax Tax? A Simple Model Without Capital

  • Laurence J. Kotlikoff

    (Department of Economics, Boston University)

  • Jianjun Miao

    (Department of Economics, Boston University
    CEMA, Central University of Finance and Economics
    AFR, Zhejiang University)

This paper challenges the traditional view of the corporate tax as taxing corporate capital rather than the act of incorporating. Our model has no capital. Entrepreneurs pay to go public to diversify their risk. In discouraging incorporation, the tax keeps more entrepreneurs private and exposed to more risk. The tax falls primarily on high-skilled entrepreneurs and to a lesser extent on labor, who experience less demand for their services. The wage reduction also induces marginal entrepreneurs to set up shop and experience more risk. Hence, the answer to the title’s question is that the corporate tax taxes risk-sharing.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 14 (2013)
Issue (Month): 1 (May)
Pages: 1-19

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Handle: RePEc:cuf:journl:y:2013:v:14:i:1:n:1:kotlikoff
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  1. Gordon, R.H. & Mackie-Mason, J.K., 1993. "Tax Distorsions to the Choice of Organizational Form," Memorandum 21/1993, Oslo University, Department of Economics.
  2. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  3. Jeffrey K. MacKie-Mason & Roger H. Gordon, 1994. "How Much Do Taxes Discourage Incorporation?," Public Economics 9401002, EconWPA.
  4. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
  5. Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092 Elsevier.
  6. Hui Chen & Jianjun Miao & Neng Wang, . "Entrepreneurial Finance and Non-diversifiable Risk," Boston University - Department of Economics - Working Papers Series wp2009-018, Boston University - Department of Economics.
  7. Bradford, David F., 1978. "Factor prices may be constant but factor returns are not," Economics Letters, Elsevier, vol. 1(3), pages 199-203.
  8. Gravelle, Jane G & Kotlikoff, Laurence J, 1989. "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 749-80, August.
  9. Christophe Chamley, 1983. "Entrepreneurial Abilities and Liabilities in a Model of Self-Selection," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 70-80, Spring.
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