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Personal Taxation, Portfolio Choice, and the Effect of the Corporation Income Tax

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  • Feldstein, Martin S
  • Slemrod, Joel

Abstract

Extending the traditional treatment of the corporate tax to an economy with a progressive personal tax fundamentally changes the analysis. While the corporate tax system (CTS) does increase the total tax rate on corporate source income for some investors, the exclusion of retained earnings implies that the CTS lowers the tax rate for high-income investors. Analyzing such an economy requires replacing the traditional "equal-yield" equilibrium condition with a more general portfolio balance model. In this model, introducing a CTS can actually increase the corporate share of the capital stock even though the relative tax rate on corporate income rises.
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  • Feldstein, Martin S & Slemrod, Joel, 1980. "Personal Taxation, Portfolio Choice, and the Effect of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 854-866, October.
    • Handle: RePEc:ucp:jpolec:v:88:y:1980:i:5:p:854-66
    DOI: 10.1086/260911
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    References listed on IDEAS

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    1. Marcel K. Richter, 1960. "Cardinal Utility, Portfolio Selection and Taxation," Review of Economic Studies, Oxford University Press, vol. 27(3), pages 152-166.
    2. Shoven, John B. & Whalley, John, 1972. "A general equilibrium calculation of the effects of differential taxation of income from capital in the U.S," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 281-321, November.
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    4. Shoven, John B, 1976. "The Incidence and Efficiency Effects of Taxes on Income from Capital," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1261-1283, December.
    5. J. E. Stiglitz, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, Oxford University Press, vol. 83(2), pages 263-283.
    6. Martin Feldstein & Lawrence Summers, 1983. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 116-152, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Scott R. Baker & Stephen Teng Sun & Constantine Yannelis, 2020. "Corporate Taxes and Retail Prices," NBER Working Papers 27058, National Bureau of Economic Research, Inc.
    2. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc.
    3. Herrera-Echeverri, Hernán & Haar, Jerry & Estévez-Bretón, Juan Benavides, 2014. "Foreign direct investment, institutional quality, economic freedom and entrepreneurship in emerging markets," Journal of Business Research, Elsevier, vol. 67(9), pages 1921-1932.
    4. Fuest, Clemens & Huber, Bernd & Nielsen, Soren B., 2003. "Why is the corporate tax rate lower than the personal tax rate?: The role of new firms," Journal of Public Economics, Elsevier, vol. 87(1), pages 157-174, January.
    5. Magnus Henrekson & Dan Johansson & Mikael Stenkula, 2010. "Taxation, Labor Market Policy and High-Impact Entrepreneurship," Journal of Industry, Competition and Trade, Springer, vol. 10(3), pages 275-296, September.
    6. Romanov, Dmitri, 2006. "The corporation as a tax shelter: Evidence from recent Israeli tax changes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1939-1954, November.
    7. Césaire Meh, 2002. "Entrepreneurial Risk, Credit Constraints, and the Corporate Income Tax: A Quantitative Exploration," Staff Working Papers 02-21, Bank of Canada.
    8. Harvey Galper & Eric Toder, 1984. "Transfer Elements in the Taxation of Income from Capital," NBER Chapters, in: Economic Transfers in the United States, pages 87-138, National Bureau of Economic Research, Inc.
    9. Frank M. Fossen & Ray Rees & Davud Rostam-Afschar & Viktor Steiner, 2020. "The effects of income taxation on entrepreneurial investment: A puzzle?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1321-1363, December.
    10. Fossen, Frank M. & Rees, Ray & Rostam-Afschar, Davud & Steiner, Viktor, 2017. "How do entrepreneurial portfolios respond to income taxation?," Hohenheim Discussion Papers in Business, Economics and Social Sciences 12-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    11. Cullen, Julie Berry & Gordon, Roger H., 2007. "Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1479-1505, August.
    12. Martin Feldstein, 1983. "Inflation, Tax Rules, and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 199-220, National Bureau of Economic Research, Inc.
    13. Joel B. Slemrod, 1983. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 427-458, National Bureau of Economic Research, Inc.
    14. Gordon, Roger H. & MacKie-Mason, Jeffrey K., 1994. "Tax distortions to the choice of organizational form," Journal of Public Economics, Elsevier, vol. 55(2), pages 279-306, October.
    15. Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," American Economic Review, American Economic Association, vol. 73(1), pages 17-30, March.
    16. Douhan, Robin & Henrekson, Magnus, 2007. "The Political Economy of Entrepreneurship," Working Paper Series 716, Research Institute of Industrial Economics.
    17. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1990. "Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form," NBER Working Papers 3222, National Bureau of Economic Research, Inc.
    18. Clemens Fuest & Bernd Huber & Søren Bo Nielsen, "undated". "Why Is the Corporate Tax Rate Lower than the Personal Tax Rate?," EPRU Working Paper Series 00-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    19. Frank Fossen & Ray Rees & Davud Rostam-Afschar & Viktor Steiner, 2017. "How Do Entrepreneurial Portfolios Respond to Taxation?," CESifo Working Paper Series 6558, CESifo.
    20. Dmitri Romanov, 2004. "The Corporation As A Tax Shelter: Evidence From Recent Israeli Tax Changes," Bank of Israel Working Papers 2004.17, Bank of Israel.
    21. Feldstein, Martin, 1988. "Imputing Corporate Tax Liabilities to Individual Taxpayers," National Tax Journal, National Tax Association;National Tax Journal, vol. 41(1), pages 37-59, March.
    22. Henrekson, Magnus, 2007. "Entrepreneurship and Institutions," Working Paper Series 707, Research Institute of Industrial Economics.
    23. Roger H. Gordon & Julie Berry Cullen, 2002. "Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S," NBER Working Papers 9015, National Bureau of Economic Research, Inc.

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