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The Political Economy of Corporate Taxation

John T. Williams and Brian K. Collins
American Journal of Political Science
Vol. 41, No. 1 (Jan., 1997), pp. 208-244
DOI: 10.2307/2111714
Stable URL: http://www.jstor.org/stable/2111714
Page Count: 37
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Political Economy of Corporate Taxation
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Abstract

We propose a theory of corporate taxation in the United States that builds on dynamic optimal taxation models. The theory is consistent with structural dependence theories (Lindblom 1977) in that expectations by investors of future tax policy limit policy maker options, primarily because corporate tax policy is time inconsistent. This theory contrasts with pluralistic models of corporate taxation because it recognizes the collective action problem facing business. We offer three propositions. First, effective corporate tax rates will be exogenous to aggregate business interests, and instead should cause the organization and activity of business. Second, a shock in effective tax rates will reduce relative levels of investment. Third, effective corporate tax rates will be exogenous to real income and real investment. Exogeneity tests and the moving average representation from several vector autoregressions are used to evaluate the propositions. All three propositions are supported. Dynamics in the effective corporate tax policy are consistent with an optimal model of taxation, at least for the period 1977-94.

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