Do Corporate and Personal Income Taxes Affect Incorporation?

The paper estimates the impact that the differences of taxation in the Spanish Personal Income Tax (IRPF) and Corporate Income Tax (IS) cause in the division of the economic activity between corporate and noncorporate firms. The exercise is based on the approach proposed by Mackie-Mason and Gordon (1997), who specifies the relation between both taxes by means of the construction of a variable that measures the “fiscal distortion” to incorporating. In our research, the fiscal distortion is estimated from the calculation of the “average effective tax rates” for the sole and social proprietors, adapting the methodology established by Devereux and Griffith (1998b). The paper concludes that the tax factors do not turn out to be significant in the organizational decisions of the firms in Spain, and that are the nontax and macroeconomic aspects those that explain the weight of the corporate firms in the managerial activity.