The reduction in the tax wedge since 1968 has expanded overall business productivity by about 4%

See Taxes, Incorporation, and Productivity by Robert J. Barro & Brian Wheaton.

"Taxes, Incorporation, and Productivity

Robert J. Barro, Brian Wheaton

NBER Working Paper No. 25508

Issued in January 2019, Revised in March 2019

NBER Program(s):Economic Fluctuations and Growth, Industrial Organization, Public Economics, Political Economy

 

U.S. businesses can be C-corporations or pass-through entities in the forms of S-corporations, partnerships, and sole proprietorships. C-corporate status conveys benefits from perpetual legal identity, limited liability, potential for public trading of shares, and ability to retain earnings. However, legal changes have enhanced pass-through alternatives, notably through the invention of the S-corporation in 1958, the advent of publicly-traded partnerships in the early 1980s, and the improved legal status of limited liability companies (LLCs) at the end of the 1980s. C-corporate form is typically subject to a tax wedge, which offsets the productivity benefits. We use a theoretical framework in which firms’ productivities under C-corporate and pass-through form are distributed as bivariate log-normal. The tax wedge determines the fraction of firms that opt for C-corporate status and also determines overall business output (productivity), the share of output generated by C-corporations, and the sensitivity of this share to the tax wedge. This framework underlies our empirical analysis of C-corporate shares of business economic activity. Long-difference regressions for 1968-2013 show that a higher tax wedge reduces the C-corporate share of net capital stocks, equity (book value), gross assets, and positive net income, as well as the corporate share of gross investment. The C-corporate shares also exhibit downward trends, likely reflecting underlying legal changes. We infer from the quantitative findings that the reduction in the tax wedge since 1968 has expanded overall business productivity by about 4%."

"The tax wedge is the deviation from the equilibrium price/quantity as a result of the taxation of a good. Because of the tax, consumers pay more for the good than they did before the tax, and suppliers receive less for the good than they did before the tax." Wikipedia