What Does the Corporate Income Tax Tax? A Simple Model Without Capital
The economics workings of the corporate income tax remain controversial. Harberger?s seminal 1962 article viewed the tax as raising the cost of capital used to produce ?corporate goods.?But ?corporate goods?can be and generally are made by non-corporate ?rms, sug- gesting that the corporate tax penalizes the act of incorporating, not the decision of already incorporated ?rms to hire capital. This paper makes this point with a simple, capital-less model featuring entrepreneurs, with risky production technologies, deciding whether or not to go public. Doing so means selling shares, which is costly and triggers the ?rm?s classi- ?cation as a corporation subject to income taxation. But going public has an upside. It permits entrepreneurs to diversify their assets. In discouraging incorporation, the corporate tax taxes business risk-sharing, keeping more entrepreneurs private and, thus, exposed to more risk. The added risk experienced by these entrepreneurs limits their demands for labor whose costs must be paid come what may. And less demand for labor spells a lower wage. Thus, the corporate tax is, as a general rule, borne, in part, by labor. But it?s borne primarily by high-skilled entrepreneurs who decide to remain incorporated despite the attendant tax liability. While it hurts high-skilled entrepreneurs and low-skilled workers, the corporate tax ben- e?ts middle-skilled entrepreneurs who remain private, but are able, thanks to the tax, to hire labor at a lower cost. The reduction in labor costs has one other key e¤ect. It induces low-skilled entrepreneurs to set up their own risky businesses rather than work for others. This represents a second channel through which the corporate tax induces excessive buiness.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Jan 2010|
|Contact details of provider:|| Postal: 270 Bay State Road, Boston, MA 02215|
Web page: http://www.bu.edu/econ/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Roger H. Gordon & Jeffrey K. MacKie-Mason, 1992. "Tax Distortions to the Choice of Organizational Form," NBER Working Papers 4227, National Bureau of Economic Research, Inc.
- Gordon, R.H. & Mackie-Mason, J.K., 1993. "Tax Distorsions to the Choice of Organizational Form," Memorandum 21/1993, Oslo University, Department of Economics.
- Roger H. Gordon & Jeffrey K. MacKie--Mason, 1994. "Tax Distortions to the Choice of Organizational Form," Public Economics 9401004, EconWPA, revised 18 Jan 1994.
- Hui Chen & Jianjun Miao & Neng Wang, 2010. "Entrepreneurial Finance and Nondiversifiable Risk," Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4348-4388, December.
- Hui Chen & Jianjun Miao & Neng Wang, "undated". "Entrepreneurial Finance and Non-diversifiable Risk," Boston University - Department of Economics - Working Papers Series wp2009-018, Boston University - Department of Economics.
- Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-180, Boston University - Department of Economics.
- Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," NBER Working Papers 14848, National Bureau of Economic Research, Inc.
- Bradford, David F., 1978. "Factor prices may be constant but factor returns are not," Economics Letters, Elsevier, vol. 1(3), pages 199-203.
- Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
- Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, vol. 52(2), pages 477-505, June.
- Jeffrey K. MacKie-Mason & Roger H. Gordon, 1991. "How Much Do Taxes Discourage Incorporation," NBER Working Papers 3781, National Bureau of Economic Research, Inc.
- Jeffrey K. MacKie-Mason & Roger H. Gordon, 1994. "How Much Do Taxes Discourage Incorporation?," Public Economics 9401002, EconWPA.
- 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 719-748, August.
- 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.
- Laurence J. Kotlikoff & Lawrence H. Summers, 1986. "Tax Incidence," NBER Working Papers 1864, National Bureau of Economic Research, Inc.
- 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.
- Christophe Chamley, 1981. "Entrepreneurial Abilities and Liabilities in a Model of Self-Selection," Cowles Foundation Discussion Papers 580, Cowles Foundation for Research in Economics, Yale University.
- 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 749-780, August.
- Jane G. Gravelle & Laurence J. Kotlikoff, 1987. "The Incidence and Efficiency Costs of Corporate Taxation when Corporate and Noncorporate Firms Produce the Same Good," NBER Working Papers 2462, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:bos:wpaper:wp2010-013. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gillian Gurish)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.