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Corporate Income Tax, Legal Form of Organization, and Employment

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  • Daphne Chen
  • Shi Qi
  • Don E. Schlagenhauf

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 ?rms. Improved capital re-allocation increases overall productive e?ciency 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.

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  • Daphne Chen & Shi Qi & Don E. Schlagenhauf, 2017. "Corporate Income Tax, Legal Form of Organization, and Employment," Working Papers 2017-21, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2017-021
    DOI: 10.20955/wp/2017.021
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    More about this item

    Keywords

    Corporate Income Tax; Legal form of Organization; Employment;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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