Corporate Income Tax, Legal Form of Organization, and Employment

Chen, Daphne; Qi, Shi; Schlagenhauf, Don E.

doi:10.20955/wp/2017.021

Working Paper

Corporate Income Tax, Legal Form of Organization, and Employment

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 ?rms. Improved capital re-allocation increases overall productive e?ciency 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;

https://doi.org/10.20955/wp/2017.021