Abstract:

Corporate taxation affects the distribution of income both by changing relative returns to capital and labor and by reducing the share of corporate activity in the economy. Corporate investments are safer and have more diversified ownership than noncorporate alternatives, so a reduction in corporate activity contributes to income dispersion and thereby increases income inequality. This effect is so large that higher corporate taxes can be associated with greater income inequality even when the corporate tax burden falls entirely on capital owned disproportionately by the rich. Risk considerations alone imply that a ten percent higher U.S. corporate tax rate increases the concentration of top U.S. incomes by 1.3-2.9 percent, which may more than offset the distributional effect of reducing average returns to capital.