HOW MUCH DO TAXES DISCOURAGE INCORPORATION

The double taxation of corporate income should discourage firms from i ncorporating. We investigate the extent to which the aggregate allocat ion of assets and taxable income in the United States between corporat e and noncorporate firms responds to the size of this tax distortion d uring the period 1959-1986. In theory, profitable firms should shift o ut of the corporate sector when the tax distortion is large, and conve rsely for firms with tax losses. Our empirical results provide strong support for these forecasts, and imply that the resulting excess burde n equals 16 percent of business tax revenue.