TAXES, ORGANIZATIONAL FORM, AND THE DEADWEIGHT LOSS OF THE CORPORATE-INCOME TAX

By changing the relative gain to incorporation, corporate taxation can play an important role in a firm's choice of organizational form. Gen eral equilibrium models have shown that substantial shifting of organi zational form in response to tax rates implies a large deadweight loss of taxation. This paper estimates the impact of taxes on organization al form using data from 1900-1939. The results indicate that the effec t of taxes is significant but small. A. corporate rate increase of 0.1 0 raises the non-corporate share of capital 0.002-0.03. The implied de adweight loss of the corporate income tax is around 5-10% of revenue. (C) 1998 Elsevier Science S.A.