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. A reduction in the corporate income tax burden encourages adoption of the C corporation legal form, which reduces capital constraints on firms. Improved capital reallocation increases the 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 nonemployment rate by up to 7 percent. (JEL E24, H25, H32, J23, J24)

Measuring Risk Allocation of Tax Burden for Small and Micro Enterprises

“…Auerbach [8] considered that the US Tax Deduction and Employment Act of 2017 will increase US capital investment, thereby increasing wages, but increasing the magnitude is difficult to predict. Chen, et al [9] found that tax cuts can reduce unemployment by 7%. Most of these difficulties with the taxes regulators might be considered as the outcomes of inadequate tax policies, as well as with the uncertainty about the changes in future policy.…”

Implementation of Good Corporate Governance at Pt Axa Mandiri Financial Services

“…In this context, the superiority that occurs is driven by the problem of agency and investor activism, while in other contexts the thing that happens is driven by the desire to attract foreign investment and easily obtain national and international legitimacy. Corporate governance in this case is very important because there is a part of institutional infrastructure (Examples such as laws, regulations, institutions and enforcement mechanisms) that can underlie the success of good economic performance (Chen, Qi and Schlagenhauf 2018).…”

Output Distortions and the Choice of Legal Form of Organization

“…1 The Tax Reform Act of 1986 made pass-thorough legal forms more attractive choices for many businesses in terms of their tax treatment, by reducing the individual tax rate below the combined corporate and divided tax rates. If firms choose a pass-through organizational form just for tax savings reasons, it is important to understand how this choice affects various margins of the economy, such as employment (Chen et al, 2018), corporate sector labor share (Smith et al, 2019b) and output growth. This is because differences between legal forms of organization extend beyond the tax treatment and include limitations on financial structure and availability of external capital.…”

“…In turn, capital of pass-through businesses is mainly financed thorough their owners' equity. This increases their cost of capital relative to C corporations (see Chen et al (2018)). These features give rise to a trade-off between two choices (1) having access to the public equity market, but facing double taxation (for C corporations) or (2) having no access to public equity, but facing only single taxation of profits (for pass-thorough entities).…”

“…The majority of theoretical contributions analysing the distortions created by the corporate tax system take the choice of legal organization form as given. We follow more recent contributions where the legal organization form is endogenous and affects risk sharing and employment (Chen et al, 2018;Kotlikoff and Miao, 2013). Our paper offers broader implications by considering the effects on aggregate output.…”