The Origins of the Corporate Income Tax: An Event Study Approach

• In Event: Taxes and Choice of Entity

Abstract

The rationale for the existence of the corporate income tax (CIT) has long been the subject of extensive discussion. One influential theory is that the CIT exists primarily as an anti-avoidance provision with respect to the personal income tax (PIT); that is, individuals would (absent a CIT) incorporate and defer PIT liabilities. An alternative view is that the CIT is intended to tax corporate “rents” (i.e., above-normal returns). The former theory implies that the CIT would only be introduced after (or simultaneously with) the introduction of a PIT. The latter theory is consistent with the introduction of a CIT regardless of the existence of a PIT.

This paper seeks to test these implications by constructing a new dataset that codes the years in which the CIT and PIT were introduced in a large sample of countries, territories, and fiscally autonomous subnational jurisdictions during the nineteenth and twentieth centuries. This dataset builds on prior datasets, most notably the Tax Introductions Database (TID), along with several other data sources. The analysis uses a stacked event study approach; this focuses on PIT adoption as the treatment, and studies the likelihood of CIT adoption around PIT events. Preliminary results suggest that for mineral resource-rich countries, the CIT is often introduced in the absence of a PIT. However, for most jurisdictions (that are not rich in mineral resources), the CIT is virtually always introduced along with, or following the introduction of, a PIT (suggesting that policymakers have generally viewed the CIT as an anti-avoidance provision).

Author

• Dhammika Dharmapala, dharmap@berkeley.edu