9422589 Gordon The purpose of this research is to analyze the role the corporate income tax plays in the overall tax system. The first part of the project explores the possibility that the primary role of the corporate tax is to provide a backstop to personal taxes on labor income. The basic idea is that individuals can arrange to receive their labor income not only in the form of cash wages, but also as capital gains on shares they own in the firm. Qualified stock options provide this opportunity, for example, in publicly traded corporations. Similarly, employees of closely held firms can be issued shares at a book value below market value instead of being paid cash wages. This project will examine carefully the various incentives involved, and then make use of recent variation in corporate vs. personal tax rates in the U.S. to measure the responsiveness of behavior to incentives using both aggregate income data and panel data on individual taxpayers. The second project will reexamine the appropriate tax treatment of foreign subsidiaries in a setting where information flows between countries occur primarily because of the activity of such subsidiaries. Not only may foreign firms acquire knowledge of domestic technology by acquiring a domestic firm that uses this technology, but domestic firms may acquire information through observation of the production process of foreign subsidiaries located nearby. While the original domestic owner of the technology would likely use the technology primarily in the domestic economy, a foreign acquirer of the information in contrast would likely make use of it primarily within its own country. As a result, a foreign acquisition may have long term implications for future economic activity. The project will attempt to model carefully the equilibrium role of foreign subsidiaries, given the possibility of such information flows. The project will then examine the implications of the model for the corporate tax treatment of bo th capital exports and capital imports. ***
