Taxes, Organizational Form, and the Deadweight Loss of the Corporate Income Tax
16 Pages Posted: 30 Jun 2000 Last revised: 16 May 2021
Date Written: September 1997
By changing the relative gain to incorporation, corporate taxation can play an important role in a firm's choice of organizational form. General equilibrium models have shown that substantial shifting of organizational form in response to tax rates implies a large deadweight loss of taxation. This paper estimates the impact of taxes on organizational form using data from 1900-1939. The results indicate that the effect of taxes is significant but small. A corporate rate increase of .10 raises the non-corporate share of capital .002-.03. The implied deadweight loss of the corporate income tax is around 5-10% of revenue.
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