How Much Do Taxes Discourage Incorporation?

Posted: 17 Mar 1997

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)

Abstract

The double taxation of corporate income should discourage firms from incorporating. We investigate the extent to which the aggregate allocation of assets and taxable income in the U.S. between corporate and non-corporate firms responds to the size of this tax distortion during the period 1959-86. In theory, profitable firms should shift out of the corporate sector when the tax distortion is large, and conversely for firms with tax losses. Our empirical results provide strong support for all of these forecasts and imply that the resulting excess burden equals 16% of business tax revenue.

JEL Classification: G32, G38, H32

Suggested Citation

MacKie-Mason, Jeffrey K. and Gordon, Roger H., How Much Do Taxes Discourage Incorporation?. Journal of Finance, Vol. 52, No. 2, June 1997. Available at SSRN: https://ssrn.com/abstract=4769

Jeffrey K. MacKie-Mason (Contact Author)

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

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

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4828 (Phone)
858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
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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