How Much Do Taxes Discourage Incorporation

Jeffrey Mackie-Mason and Roger Gordon

No 3781, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: One of the most basic distortions created by the double taxation of corporate income is the disincentive to incorporate. In this paper, we investigate the extent to which the aggregate allocation of assets and taxable income in the U.S. between corporate vs. noncorporate forms of organization during the period 1959-86 has responded to the size of the tax distortion discouraging firms from incorporating. In theory, profitable firms should shift out of the corporate sector when the tax distortion to incorporating is larger, and conversely for firms with tax losses. Our empirical results provide strong support for these theoretical forecasts, and hold consistently across a wide variety of specifications and measures of the tax variables. Measured effects are small, however, throwing doubt on the economic importance of tax-induced changes in organizational form.

Date: 1991-07
Note: PE
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Published as Journal of Finance, vol.50, no.2, June 1997.

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Related works:
Journal Article: How Much Do Taxes Discourage Incorporation? (1997)
Working Paper: How Much Do Taxes Discourage Incorporation? (1994)
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