Skip to main content Accessibility help
Hostname: page-component-7ccbd9845f-jxkh9 Total loading time: 0.448 Render date: 2023-02-02T01:52:34.293Z Has data issue: true Feature Flags: { "useRatesEcommerce": false } hasContentIssue true

4 - How Elastic Is the Corporate Income Tax Base?

Published online by Cambridge University Press:  30 July 2009

Jonathan Gruber
Massachusetts Institute of Technology and NBER
Joshua Rauh
University of Chicago and NBER
Alan J. Auerbach
University of California, Berkeley
James R. Hines, Jr.
University of Michigan, Ann Arbor
Joel Slemrod
University of Michigan, Ann Arbor
Get access


The federal government of the United States primarily finances its expenditures from income taxation, at both the individual and corporate levels. Traditionally, corporate income taxation was about half as large as individual income taxation as a source of federal revenue; today, the ratio of corporate tax revenues to individual tax revenues is only about 15 percent. Nevertheless, a large economics literature continues to consider the corporate tax as a primary determinant of corporate behavior in the United States. Numerous articles have addressed the impact of the corporate tax on corporate investment and financing.

Oddly, this literature has not addressed directly the question of how sensitive the base of corporate income taxation is to the corporate tax rate. Past literature has addressed pieces of this question, but there is no clear estimate that emerges from past work. As emphasized by Saez (2004), what determines the ultimate efficiency of a tax system, absent external effects of taxation, is the elasticity of the base of taxable income with respect to the tax rate. Indeed, a large literature has arisen in public economics devoted to estimating this elasticity with respect to the individual income tax system. Yet there is no comparable work on corporate taxation.

In this chapter, we estimate the impact of the corporate tax rate on the level of corporate taxable income. An obvious difficulty with such an exercise is that the tax rate itself is determined by the level of taxable income.

Publisher: Cambridge University Press
Print publication year: 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Altshuler, Rosanne, and Auerbach, Alan J.. 1990. “The Significance of Tax Law Asymmetries: An Empirical Investigation.” Quarterly Journal of Economics 105(1): 61–86.CrossRefGoogle Scholar
Auerbach, Alan J. 1983. “Corporate Taxation in the United States.” Brookings Papers on Economic Activity (2): 451–513.CrossRefGoogle Scholar
Auerbach, Alan J., and Hassett, Kevin A.. 1992. “Tax Policy and Business Fixed Investment in the United States.” Journal of Public Economics 47(2): 141–170.CrossRefGoogle Scholar
Auerbach, Alan J., and Hines, James R. Jr. 1988. “Investment Tax Incentives and Frequent Tax Reforms.” American Economic Review Papers and Proceedings 78(2): 211–216.Google Scholar
Bertrand, Marianne, Duflo, Esther, and Mullainathan, Sendhil. 2004. “How Much Should We Trust Differences-in-Differences Estimates?Quarterly Journal of Economics 119(1): 249–275.CrossRefGoogle Scholar
Caballero, Richard J., Eduardo M. R. A. Engel, and John C. Haltiwanger. 1995. “Plant-Level Adjustment and Aggregate Investment Dynamics.” Brookings Papers on Economic Activity (2): 1–54.
Carroll, Robert, and David Joulfaian. 1997. “Taxes and Corporate Choice of Organizational Form.” Working Paper 73. (Washington, DC: U.S. Department of the Treasury, Office of Tax Analysis).
Cummins, Jason G., Hassett, Kevin A., and Hubbard, R. Glenn. 1994. “A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments.” Brookings Papers on Economic Activity (2): 1–74.CrossRefGoogle Scholar
Cummins, Jason G., Hassett, Kevin A., and Hubbard, R. Glenn. 1996. “Tax Reforms and Investment: A Cross-Country Comparison.” Journal of Public Economics 62(1–2): 237–273.CrossRefGoogle Scholar
Feldstein, Martin. 1995. “The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act.” Journal of Political Economy 103(3): 551–572.CrossRefGoogle Scholar
Fullerton, Don. 1984. “Which Effective Tax Rate?National Tax Journal 37(1): 23–41.Google Scholar
Fullerton, Don. 1987. “The Indexation of Interest, Depreciation, and Capital Gains and Tax Reform in the United States.” Journal of Public Economics 32(1): 25–51.CrossRefGoogle Scholar
Fullerton, Don. 1999. “Marginal Effective Tax Rate.” In Cordes, Joseph J., Ebel, Robert D., and Gravelle, Jane G., eds., The Encyclopedia of Taxation and Tax Policy. (Washington, DC: Urban Institute Press), pp. 270–272.Google Scholar
Giertz, Seth. 2004. “Recent Literature on Taxable-Income Elasticities.” Technical Paper 2004–16. (Washington, DC: Congressional Budget Office).
Goolsbee, Austan. 1998a. “Investment Tax Incentives, Prices, and the Supply of Capital Goods.” Quarterly Journal of Economics 113(1): 121–148.CrossRefGoogle Scholar
Goolsbee, Austan. 1998b. “Taxes, Organizational Form, and the Deadweight Loss of the Corporate Income Tax.” Journal of Public Economics 69 (1): 143–152.CrossRefGoogle Scholar
Goolsbee, Austan. 2004. “The Impact and Inefficiency of the Corporate Income Tax: Evidence from State Organizational Form Data.” Journal of Public Economics 88(11): 2283–2299.CrossRefGoogle Scholar
Goolsbee, Austan, and Desai, Mihir A.. 2004. “Investment, Overhang, and Tax Policy.” Brookings Papers on Economic Activity (2): 285–355.Google Scholar
Gordon, Roger H., and MacKie-Mason, Jeffrey K.. 1994. “Tax Distortions to the Choice of Organizational Form.” Journal of Public Economics 55(2): 279–306.CrossRefGoogle Scholar
Gordon, Roger H., and MacKie-Mason, Jeffrey K.. 1997. “How Much Do Taxes Discourage Incorporation?Journal of Finance 52(2): 477–505.Google Scholar
Gordon, Roger H., and Joel Slemrod. 1988. “Do We Collect Any Revenue from Taxing Capital Income?” In Summers, Lawrence, ed., Tax Policy and the Economy, vol. 2 (Cambridge, MA: MIT Press), pp. 89–103.Google Scholar
Gordon, Roger H., Laura Kalambokidis, and Joel Slemrod. 2003. “A New Summary Measure of the Effective Tax Rate on Investment.” NBER Working Paper 9535 (Cambridge, MA: National Bureau of Economic Research).
Graham, John. 2000. “How Big Are the Tax Benefits of Debt?Journal of Finance 55(5): 1901–1941.CrossRefGoogle Scholar
Gravelle, Jane G. 1982. “Effects of the 1981 Depreciation Revisions on the Taxation of Income from Business Capital.” National Tax Journal 35(1): 1–20.Google Scholar
Gravelle, Jane G. 1983. “Capital Income Taxation and Efficiency in the Allocation of Investment.” National Tax Journal 36(3): 297–306.Google Scholar
Gravelle, Jane G. 1994. The Economic Effects of Taxing Capital Income. (Cambridge, MA: MIT Press).Google Scholar
Gravelle, Jane G. 2001. “Whither Depreciation?National Tax Journal 54(3): 513–526.CrossRefGoogle Scholar
Gravelle, Jane G., and Kotlikoff, Laurence J.. 1989. “The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good.” Journal of Political Economy 97(4): 749–780.CrossRefGoogle Scholar
Gruber, Jonathan, and Saez, Emmanuel. 2002. “The Elasticity of Capital Income: Evidence and Implications.” Journal of Public Economics 84(1): 1–32.CrossRefGoogle Scholar
Hall, Robert E., and Jorgensen, Dale W.. 1967. “Tax Policy and Investment Behavior.” American Economic Review 57(3): 391–414.Google Scholar
Hanlon, Michelle. 2003. “What Can We Infer About a Firm's Taxable Income from Its Financial Statements?National Tax Journal 56(4): 831–863.CrossRefGoogle Scholar
Harberger, Arnold C. 1962. “The Incidence of the Corporation Income Tax.” Journal of Political Economy 70(3): 215–240.CrossRefGoogle Scholar
House, Christopher, and Matthew D. Shapiro. 2006. “Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation,” NBER Working Paper W12514. (Cambridge, MA: National Bureau of Economic Research).
Hulten, Charles, and Frank Wyckoff. 1981. “The Measurement of Economic Depreciation.” In Hulten, Charles, ed., Depreciation, Inflation, and the Taxation of Income from Capital. (Washington, DC: Urban Institute Press), pp. 45–60.Google Scholar
King, Mervyn A., and Fullerton, Don. 1984. The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and West Germany. (Chicago: University of Chicago Press).CrossRefGoogle Scholar
Kopczuk, Wojciech. 2005. “Tax Bases, Tax Rates and the Elasticity of Reported Income.” Journal of Public Economics 89(11–12): 2093–2119.CrossRefGoogle Scholar
Lindsey, Lawrence. 1987. “Capital Gains: Rates, Realizations, and Revenues.” In Feldstein, Martin, ed., The Effects of Taxation on Capital Formation. (Chicago: University of Chicago Press), pp. 69–97.Google Scholar
MacKie-Mason, Jeffrey. 1990. “Do Taxes Affect Corporate Financing Decisions?Journal of Finance 45(5): 1471–1493.CrossRefGoogle Scholar
Manzon, Gil B. Jr., and Plesko, George A.. 2002. “The Relation Between Financial and Tax Reporting Measures of Income.” Tax Law Review 55(2): 175–214.Google Scholar
Miller, Merton. 1977. “Debt and Taxes.” Journal of Finance 32(2): 261–275.Google Scholar
Mills, Lillian, and Plesko, George A.. 2003. “Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income.” National Tax Journal 56(4): 865–893.CrossRefGoogle Scholar
Plesko, George A. 1994. “Corporate Taxation and the Financial Characteristics of Firms.” Public Finance Quarterly 22(3): 311–334.CrossRefGoogle Scholar
Plesko, George A. 2003. “An Evaluation of Alternative Measures of Corporate Tax Rates.” Journal of Accounting and Economics 35(2): 201–226.CrossRefGoogle Scholar
Saez, Emmanuel. 2004. “Reported Incomes and Marginal Tax Rates, 1960–2000: Evidence and Policy Implications.” In Poterba, James, ed., Tax Policy and the Economy, vol. 18. (Cambridge, MA: MIT Press): pp. 117–174.Google Scholar
Stickney, C. P., and McGee, V. E.. 1982. “Effective Corporate Tax Rates: The Effect of Size, Capital Intensity, Leverage, and Other Factors.” Journal of Accounting and Public Policy 1(2): 125–152.CrossRefGoogle Scholar
U.S. Department of the Treasury. Internal Revenue Service. 2003. “Corporation Income Tax Brackets and Rates: 1909–2002.” (Washington, DC: Internal Revenue Service Data Release).
Cited by

Save book to Kindle

To save this book to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the or variations. ‘’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats