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Corporate Income Tax, Legal Form of Organization, and Employment

52 Pages Posted: 1 Aug 2017 Last revised: 1 Nov 2017

Daphne Chen

Econ One Research, Inc.

Shi Shao Qi

Florida State University - Department of Economics

Don E Schlagenhauf

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: 2017-07-31

Abstract

A dynamic stochastic occupational choice model with heterogeneous agents is developed to evaluate the impact of a corporate income tax reduction on employment. In this framework, the key margin is the endogenous entrepreneurial choice of the legal form of organization (LFO). A reduction in the corporate income tax burden encourages adoption of the C corporation legal form, which reduces capital constraints on firms. Improved capital re-allocation increases overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the non-employment rate by up to 7 percent.

Keywords: Corporate Income Tax, Legal form of Organization, Employment

JEL Classification: E02, E24, E60, L22

Suggested Citation

Chen, Daphne and Qi, Shi Shao and Schlagenhauf, Don E, Corporate Income Tax, Legal Form of Organization, and Employment (2017-07-31). FRB St. Louis Working Paper No. 2017-21. Available at SSRN: https://ssrn.com/abstract=3011840 or http://dx.doi.org/10.20955/wp/2017.021

Daphne Chen (Contact Author)

Econ One Research, Inc. ( email )

United States

Shi Qi

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

Don Schlagenhauf

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

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