How Much Do Taxes Discourage Incorporation

35 Pages Posted: 26 May 2004

See all articles by Jeffrey K. MacKie-Mason

Jeffrey K. MacKie-Mason

UC Berkeley; University of Michigan

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)

Date Written: July 1991

Abstract

One of the most basic distortions created by the double taxation of corporate income is the disincentive to incorporate. In this paper, we investigate the extent to which the aggregate allocation of assets and taxable income in the U.S. between corporate vs. noncorporate forms of organization during the period 1959-86 has responded to the size of the tax distortion discouraging firms from incorporating. In theory, profitable firms should shift out of the corporate sector when the tax distortion to incorporating is larger, and conversely for firms with tax losses. Our empirical results provide strong support for these theoretical forecasts, and hold consistently across a wide variety of specifications and measures of the tax variables. Measured effects are small, however, throwing doubt on the economic importance of tax-induced changes in organizational form.

Suggested Citation

MacKie-Mason, Jeffrey K. and Gordon, Roger H., How Much Do Taxes Discourage Incorporation (July 1991). NBER Working Paper No. w3781. Available at SSRN: https://ssrn.com/abstract=375302

Jeffrey K. MacKie-Mason

UC Berkeley ( email )

102 South Hall
Berkeley, CA 94720-4600
United States

HOME PAGE: http://jeff-mason.com

University of Michigan ( email )

Ann Arbor, MI 48109-1092
United States

HOME PAGE: http://http:/jeff-mason.com/

Roger H. Gordon (Contact Author)

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

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858-534-4828 (Phone)
858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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