Are "Real" Responses to Taxes Simply Income Shifting between Corporate and Personal Tax Bases?

75 Pages Posted: 24 Apr 1999 Last revised: 14 Aug 2000

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Date Written: May 1998

Abstract

Two well-noted phenomena of recent decades are the increasing concentration of personal income and the declining rate of corporate profitability. This paper investigates to what extent these two trends have a common explanation extent these two trends have a common explanation-shifting of income to the personal tax base from the corporate tax base caused by the generally declining difference between personal tax rates and corporation income tax rates. This paper presents evidence that a substantial amount of income shifting has in fact occured since 1965, based on time-series regression analyses that reveal that an increase in corporate tax rates relative to personal rates resulted in an increase in reported personal income and a drop in reported corporate income, even after controlling for corproate use of debt finance and for the amount of corporate assets. We focus on one mechanism for shifting--changing the form of compensation for executives and other workers, such as between wage compensation and greater use of stock options. The potential importance of income shifting requires a reinterpretation of both the efficiency and distributional consequences of of changes in the tax structure.

Suggested Citation

Gordon, Roger H. and Slemrod, Joel B., Are "Real" Responses to Taxes Simply Income Shifting between Corporate and Personal Tax Bases? (May 1998). NBER Working Paper No. w6576. Available at SSRN: https://ssrn.com/abstract=160708

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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Harvard University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business ( email )

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National Bureau of Economic Research (NBER)

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