NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

What Does the Corporate Income Tax Tax? A Simple Model without Capital

Laurence J. Kotlikoff, Jianjun Miao

NBER Working Paper No. 16199
Issued in July 2010
NBER Program(s):   PE

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 firms, suggesting that the corporate tax penalizes the act of incorporating, not the decision of already incorporated firms 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 firm's classification 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 is 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 benefits 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 effect. 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 business.

download in pdf format
   (158 K)

email paper

This paper is available as PDF (158 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16199

Published: Laurence J. Kotlikoff & Jianjun Miao, 2013. "What Does the Corporate Income Tax Tax? A Simple Model Without Capital," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 1-19, May. citation courtesy of

Users who downloaded this paper also downloaded these:
Markle and Shackelford w16839 Cross-Country Comparisons of Corporate Income Taxes
Gatev and Ross w7835 Rebels, Conformists, Contrarians and Momentum Traders
West t0183 Another Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator
Leamer and Levinsohn w4940 International Trade Theory: The Evidence
Anderson and Meyer w5201 The Incidence of a Firm-Varying Payroll Tax: The Case of Unemployment Insurance
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us