Output distortions and the choice of legal form of organization

Taxation of Top Incomes and Tax Avoidance

“…The predictions of our model are in line with Lindsey (1987), Feldstein (1995), Dyrda and Pugsley (2019), and Bilicka and Raei (2023) who report that cutting top marginal income tax rates in the 1980s stimulated entrepreneurship in the US and induced a switch from C-corporations to pass-through businesses. Slemrod (1996) argues that these large responses were mainly due to tax avoidance rather than economic activity.…”

“…increase in the share of S-corporations between the period 1980-1984 and the period 1985-1989. Bilicka and Raei (2023) find similar p.p. changes in the shares of C-corporations and S-corporations considering business entities including non-employers.…”

“…Our micro-foundation of tax avoidance builds on the earlier literature that studies the entrepreneurial choice of incorporation and the role of taxation and tax distortions in this context, see, among others, Gordon and Slemrod (1998), Mackie- Mason and Gordon (1997), Gordon and MacKie-Mason (1994). Bilicka and Raei (2023) apply an industry equilibrium model in which the legal form of organization is an endogenous choice to study how differential tax treatments distort aggregate output. Chen et al (2018) analyze the impact of the corporate tax on the entrepreneurial choice of the legal form of organization and unemployment within a dynamic stochastic occupational choice model.…”