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Income Taxation and Business Incorporation: Evidence From the Early Twentieth Century

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  • Li Liu

Abstract

A differential between the corporate income tax rate and the personal income tax rates applied to non-corporate income can play an important role in a frm’s choice of organizational form. The impact and interdependency of income tax incentives are crucial factors in the design of effcient tax policies. In this paper I exploit the variation in income taxes across U.S. states in the early 20th century to estimate these sensitivities. The potential endogeneity of state taxes is addressed using an instrumental variables approach. The results demonstrate that the relative taxation of corporate to personal income has a signifcant impact on the corporate share of economic activities. On average, a ten percentage point increase in the corporate tax rate is associated with a 0.2 to 0.3 percent decrease in the corporate share of economic activities, while a ten percentage point increase in the personal income tax rates applied to non-corporate income raises the corporate share of economic activities by 0.5 to 0.6 percent.

Suggested Citation

  • Li Liu, 2014. "Income Taxation and Business Incorporation: Evidence From the Early Twentieth Century," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(2), pages 387-418, June.
  • Handle: RePEc:ntj:journl:v:67:y:2014:i:2:p:387-418
    DOI: 10.17310/ntj.2014.2.04
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    File URL: https://doi.org/10.17310/ntj.2014.2.04
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On the effects of income tax to the private businesses
      by bearodr in NEP-HIS blog on 2012-11-08 18:23:20

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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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