Income Taxation and Business Incorporation: Evidence from the Early Twentieth Century

Li Liu

No 1205, Working Papers from Oxford University Centre for Business Taxation

Abstract: If the corporate income tax is set at a different rate from non-corporate in-come tax, it can play an important role in a firm’s choice of organizational form. The impact and interdependency of income tax incentives are crucial factors in the formation of designing efficient tax policies. In this paper I exploit the variation in income taxes across U.S. states in the early twentieth century to estimate these sensitivities. Potential endogeneity of state taxes is addressed using an IV approach. The results demonstrate that the relative taxation of corporate to personal income has a significant impact on the corporate share of economic activities. On average, a one percent increase in corporate taxes is associated with 0.2-0.3 percent decreases the corporate share of economic activities, whereas a one per-cent increase in personal taxes raises the corporate share of economic activities by 0.5-0.6 percent.

Keywords: Corporate income tax; Personal income tax; Incorporation; Early Twentieth Century (search for similar items in EconPapers)
JEL-codes: H25 H32 H71 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-acc, nep-his, nep-iue and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Income Taxation and Business Incorporation: Evidence From the Early Twentieth Century (2014)
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