CORPORATE-TAXATION AND THE FINANCIAL CHARACTERISTICS OF FIRMS

This article provides estimates of the effects of corporate taxation o n the financial characteristics of firms. For a large number of corpor ations the corporate tax is voluntary, as they have the choice of oper ating as an S corporation-a pass-through entity similar to a partnersh ip. Given that firms appear to volunteer to pay an additional tax, thi s article examines the behavior of firms to identify the relationship between their choice to be subject to the corporate tax and tax minimi zing strategies. Analyzing firms with positive and negative income sep arately, the results suggest that the probability a firm has chosen to be taxable increases with firm size and with activity consistent with mitigating both the corporate and individual tax on corporate income. In addition, there is strong evidence that the additional administrat ive burden caused by a lack of conformity between state and federal ta x treatment of S corporations provides a significant disincentive to t he use of pass-through corporations.