A reduction in the corporate income tax burden encourages adoption of the C corporation legal form; improved capital reallocation increases the overall productive efficiency in the economy and therefore reduce unemployment by up to 7pct

Corporate Income Tax, Legal Form of Organization, and Employment. Daphne Chen, Shi Qi, and Don Schlagenhauf. American Economic Journal: Macroeconomics. Oct 2018, Vol. 10, No. 4: Pages 270-304. https://pubs.aeaweb.org/doi/pdfplus/10.1257/mac.20140103

Abstract: A dynamic stochastic occupational choice model with heterogeneous agents is developed to evaluate the impact of a corporate income tax reduction on employment. In this framework, the key margin is the endogenous entrepreneurial choice of the legal form of organization. A reduction in the corporate income tax burden encourages adoption of the C corporation legal form, which reduces capital constraints on firms. Improved capital reallocation increases the overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the nonemployment rate by up to 7 percent. (JEL E24, H25, H32, J23, J24)