infonet-economy

This paper provides a theory of incorporation and taxation that emphasizes
the role of the corporate legal form in facilitating access to external capital
and the potential advantages of limited liability. Incorporation relaxes financing
constraints and makes corporations larger than comparable non-corporate
firms. For the same reason, a tax on corporations imposes a smaller first-order
welfare loss than a tax on non-corporate firms. We study the consequences of
tax reform and compare the role of taxation with other institutional reforms.