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Imputing Corporate Tax Liabilities to Individual Taxpayers

  • Martin Feldstein

This paper presents a method of studying the distributional consequences of corporate tax changes by imputing to individual tax returns the net effect of changes in effective corporate tax rates. Particular attention is given to the difference between nominal and real capital income, to the problem of corporate pension funds, and to the automatic effect of corporate tax changes on dividends and retained earnings. Application of this imputation method to the tax changes enacted in 1986 shows that the actual distribution of the total tax change was very different from the traditional distribution of only the personal income tax change. The net imputed corporate tax increase was equivalent to a rise of 6 percentage points in the personal income tax among taxpayers with 1988 incomes over $200,000 and 4 percentage points among taxpayers with incomes between $100,000 and $200,000. The corporate income tax increase also added the equivalent of an 8 percent rise in the income tax for taxpayers with incomes between $10,000 and $20,000. By contrast, for middle income taxpayers (with incomes between $30,000 and $75,000) the corporate tax increase was equivalent to an income tax rise of only 1 or 2 percent. The analysis shows that the higher corporate tax represents a particularly large increase for taxpayers over the age of 65; on average, tax returns with at least one taxpayer over age 65 will pay 12 percent more tax under the 1986 tax legislation than they would otherwise have paid. Distributional considerations will continue to play a large role in the public and Congressional discussions of future tax reforms. The present study shows that it is very important to include the distributional consequences of corporate as well as personal tax changes in the analysis of any proposed tax reforms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2349.

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Date of creation: Aug 1987
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Publication status: published as From National Tax Journal, Vol. XLI, No. 1, pp. 37-59, (March 1988).
Handle: RePEc:nbr:nberwo:2349
Note: PE
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  1. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Pensions in the American Economy," NBER Books, National Bureau of Economic Research, Inc, number kotl83-1.
  2. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
  3. 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.
  4. Martin Feldstein & Joel Slemrod, 1980. "Personal Taxation, Portfolio Choice and The Effect of the Corporation Income Tax," NBER Working Papers 0241, National Bureau of Economic Research, Inc.
  5. Joel Slemrod, 1984. "A General Equilibrium Model of Taxation That Uses Micro-Unit Data: Withan Application to the Impact of Instituting a Flat-Rate Income Tax," NBER Working Papers 1461, National Bureau of Economic Research, Inc.
  6. Martin Feldstein, 1983. "Behavioral Simulation Methods in Tax Policy Analysis," NBER Books, National Bureau of Economic Research, Inc, number feld83-2.
  7. repec:cup:cbooks:9780521266550 is not listed on IDEAS
  8. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
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