Corporate Income Tax, Legal Form of Organization, and Employment
52 Pages Posted: 1 Aug 2017 Last revised: 1 Nov 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
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