Corporate Income Tax, Legal Form of Organization, and Employment

Chen, Daphne; Qi, Shi Shao; Schlagenhauf, Don

doi:10.20955/wp/2017.021

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Corporate Income Tax, Legal Form of Organization, and Employment

FRB St. Louis Working Paper No. 2017-21

52 Pages Posted: 1 Aug 2017 Last revised: 5 Jan 2019

See all articles by Daphne Chen

Shi Shao Qi

Florida State University - Department of Economics

Don Schlagenhauf

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: 2017-07-31

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.

Keywords: Corporate Income Tax, Legal form of Organization, Employment

JEL Classification: E02, E24, E60, L22

Suggested Citation: Suggested Citation

Chen, Daphne and Qi, Shi Shao and Schlagenhauf, Don, Corporate Income Tax, Legal Form of Organization, and Employment (2017-07-31). FRB St. Louis Working Paper No. 2017-21, Available at SSRN: https://ssrn.com/abstract=3011840 or http://dx.doi.org/10.20955/wp/2017.021