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

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  • Li Liu

    () (Centre for Business Taxation, University of Oxford)

Abstract

If the corporate income tax is set at a different rate from non-corporate in-come tax, it can play an important role in a firm’s choice of organizational form. The impact and interdependency of income tax incentives are crucial factors in the formation of designing efficient tax policies. In this paper I exploit the variation in income taxes across U.S. states in the early twentieth century to estimate these sensitivities. Potential endogeneity of state taxes is addressed using an IV approach. The results demonstrate that the relative taxation of corporate to personal income has a significant impact on the corporate share of economic activities. On average, a one percent increase in corporate taxes is associated with 0.2-0.3 percent decreases the corporate share of economic activities, whereas a one per-cent increase in personal taxes raises the corporate share of economic activities by 0.5-0.6 percent.

Suggested Citation

  • Li Liu, 2012. "Income Taxation and Business Incorporation: Evidence from the Early Twentieth Century," Working Papers 1205, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1205
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    References listed on IDEAS

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    Blog mentions

    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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    Cited by:

    1. Mazhar Waseem, 2013. "Taxes, Informality and Income Shifting: Evidence from a Recent Pakistani Tax Reform," 2013 Papers pwa641, Job Market Papers.
    2. Michael P. Donohoe & Gary A. McGill & Edmund Outslay, 2014. "Risky Business: The Prosopography of Corporate Tax Planning," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(4), pages 851-874, December.
    3. Bergner, Sören Martin & Bräutigam, Rainer & Evers, Maria Theresia & Spengel, Christoph, 2017. "The use of SME tax incentives in the European Union," ZEW Discussion Papers 17-006, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    Corporate income tax; Personal income tax; Incorporation; Early Twentieth Century;

    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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