Ota Paper 101: A Review Of The Evidence On The Incidence Of The Corporate Income Tax - William M. Gentry (Office Of Tax Analysis, Us Department Of The Treasury) Page 35
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42examine firm-level data using a user cost of capital model, they test whether investment-to-GDP
ratios depend on the effective tax rate on investment. They report substantial negative effects of
tax rates on investment rates: increasing the corporate tax rate by 10 percentage points leads to an
investment rate that is 2.2 percentage points lower (compared to an average investment rate of
21.5%); much of the effect appears to come through a reduction in FDI.
Overall, a consensus seems to be emerging that investment responds to tax policy. The
amount of capital in the corporate sector depends on the taxation of capital. This relationship is
what one would expect to find if capital is able to move out of the corporate sector in response to
tax policy and, as a result, labor may bear a sizable portion of the corporate tax.
IV.C. Does Activity Shift between Corporate and Noncorporate Forms of Organization?
An alternative channel through which the corporate income tax can affect the amount of
capital in the corporate sector is how capital is allocated across organizational forms. In the
classic formulation of the Harberger model, the noncorporate sector produces different goods
(e.g., housing) than the corporate sector. Reallocating capital across sectors meant changing the
mix of outputs in the economy; this shift in output could affect the overall return to capital and
labor. The substitutability of capital for labor in the two sectors will affect the eventual incidence
of the corporate income tax.
In a pair of papers, Gravelle and Kotlikoff (1989 and 1993) build general equilibrium
models in which corporate and noncorporate forms operate within the same industry. The
corporate and noncorporate firms differ along one of two dimensions: (1) in the mutual
production model, they differ in that corporate managers run corporations but entrepreneurs
operate noncorporate firms and entrepreneurial skill is distributed throughout the economy; or (2)
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