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Federal Reserve Bank of St. Louis
Working Papers
Corporate Income Tax, Legal Form of Organization, and Employment
Daphne Chen
Shi Qi
Don E. Schlagenhauf
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 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.


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Daphne Chen & Shi Qi & Don E. Schlagenhauf, Corporate Income Tax, Legal Form of Organization, and Employment, Federal Reserve Bank of St. Louis, Working Papers 2017-21, 31 Jul 2017.
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Keywords: Corporate Income Tax; Legal form of Organization; Employment
DOI: 10.20955/wp/2017.021
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