Corporate Taxation and the Financial Characteristics of Firms

Abstract

This article provides estimates of the effects of corporate taxation on the financial characteristics of firms. For a large number of corporations the corporate tax is voluntary, as they have the choice of operating as an S corporation—a pass-through entity similar to a partnership. Given that firms appear to volunteer to pay an additional tax, this article examines the behavior of firms to identify the relationship between their choice to be subject to the corporate tax and tax minimizing strategies. Analyzing firms with positive and negative income separately, the results suggest that the probability a firm has chosen to be taxable increases with firm size and with activity consistent with mitigating both the corporate and individual tax on corpo rate income. In addition, there is strong evidence that the additional administrative burden caused by a lack of conformity between state and federal tax treatment of S corporations provides a significant disincentive to the use of pass-through corporations.