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Corporate income tax, legal form of organization, and employment

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  • Daphne Chen
  • Shi Qi
  • Don E. Schlagenhauf

Abstract

We adopt a dynamic stochastic occupational choice model with heterogeneous agents and evaluate the impact of a potential reduction in the corporate income tax on employment. We show that a reduction in corporate income tax leads to moderate job creation. In the extreme case, the elimination of the corporate income tax would reduce the non-employed population by 5.4 percent. In the model, a reduction in the corporate income tax creates jobs through two channels, one from new entry firms and one from existing firms changing their form of legal organization. In particular, the latter accounts for 85.7 percent of the new jobs created.

Suggested Citation

  • Daphne Chen & Shi Qi & Don E. Schlagenhauf, 2014. "Corporate income tax, legal form of organization, and employment," Working Papers 2014-18, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2014-018
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    Cited by:

    1. Katarzyna Anna Bilicka & Sepideh Raei, 2020. "Output Distortions and the Choice of Legal Form of Organization," CESifo Working Paper Series 8756, CESifo.
    2. Lejour, Arjan & Massenz, Gabriella, 2020. "Income Shifting and Organizational Form Choice : Evidence from Europe," Other publications TiSEM 3138edef-d645-4113-9981-3, Tilburg University, School of Economics and Management.
    3. Alexis Anagnostopoulos & Orhan Erem Atesagaoglu & Eva Carceles-Poveda, 2018. "Financing Corporate Tax Cuts with Shareholder Taxes," Department of Economics Working Papers 18-07, Stony Brook University, Department of Economics.
    4. Sumudu Kankanamge & Alexandre Gaillard, 2019. "Entrepreneurship, Inter-Generational Business Transmission and Aging," 2019 Meeting Papers 1503, Society for Economic Dynamics.
    5. Alexis Anagnostopoulos & Orhan Erem Atesagaoglu & Eva Carceles-Poveda, 2014. "On the Double Taxation of Corporate Profits," Department of Economics Working Papers 14-03, Stony Brook University, Department of Economics.
    6. Benjamin Pugsley & Sebastian Dyrda, 2017. "Taxes, Regulations of Businesses and Evolution of Income Inequality in the US," 2017 Meeting Papers 1463, Society for Economic Dynamics.
    7. Li, Bing & Liu, Chang & Sun, Stephen Teng, 2021. "Do corporate income tax cuts decrease labor share? Regression discontinuity evidence from China," Journal of Development Economics, Elsevier, vol. 150(C).
    8. Beatriz González, 2020. "Macroeconomics, firm dynamics and IPOs," Working Papers 2030, Banco de España.
    9. E. Mark Curtis & Ryan Decker, 2018. "Entrepreneurship and State Taxation," Finance and Economics Discussion Series 2018-003, Board of Governors of the Federal Reserve System (U.S.).
    10. Don schlagenhauf, 2019. "The Kansas Tax Experiment: The Matter of Legal Form of Organization," 2019 Meeting Papers 392, Society for Economic Dynamics.
    11. Antonio Estache & Beni Kouevi Gath, 2019. "Corporate Income Taxes and (Un-)Employment in the OECD," Working Papers ECARES 2019-11, ULB -- Universite Libre de Bruxelles.
    12. Bing Xu & Lili Li & Yan Liang & Mohib Ur Rahman, 2019. "Measuring Risk Allocation of Tax Burden for Small and Micro Enterprises," Sustainability, MDPI, Open Access Journal, vol. 11(3), pages 1-20, January.

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    More about this item

    Keywords

    Corporate Income Taxes; Employment; Firm heterogeneity; Entrepreneurs;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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