52 Pages Posted: 1 Aug 2017 Last revised: 4 Aug 2017
Date Written: 2017-07-31
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: 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