Tax-Motivated Firm Splitting

Gabriella Massenz

No 1539, Working Paper Series from Research Institute of Industrial Economics

Abstract: How do corporate tax systems shape the boundaries of the firm? This paper shows that nonlinear corporate income taxation can distort firms’ organizational structures by inducing tax-motivated firm splitting. I use administrative data on corporations and their owners and exploit two reforms that altered the tax benefits and costs of dividing a firm into multiple entities. First, I show that a temporary increase in the tax advantage of splitting reduces the share of firms filing jointly for corporate income tax purposes. Second, once the benefit is perceived as permanent and minimum capital requirements for new firms are abolished, the number of firms per entrepreneur rises significantly and persistently. Finally, I show that reorganizations are primarily driven by tax motives, as I find no effect on firms’ total assets, employment, or industry diversification. These findings highlight extensive-margin responses of business organization to corporate taxation, with relevant implications for the understanding of firm dynamics and for tax design.

Keywords: Firm splitting; Corporate income tax; Tax avoidance (search for similar items in EconPapers)
JEL-codes: H25 H26 H32 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2025-10-30
New Economics Papers: this item is included in nep-acc, nep-ent, nep-eur, nep-pbe, nep-pub and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:1539

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