The Kansas tax experiment: The matter of legal form of organization

Using a dynamic stochastic occupational choice model with heterogeneous firms, this paper studies a sweeping business tax-cut program enacted in the State of Kansas during 2012-2016. This paper finds that "The Kansas Tax Experiment" distorts entrepreneurial choice of legal form of organization (LFO), and encourages the adoption of the passthrough status over the C-corporate legal form. Because pass-through businesses face more constraints on access-to-capital, the policy reduces aggregate productive efficiency and leads to declines in output, capital formation, and employment growth. This article highlights the importance of considering LFO choice when making a business tax policy change. (C) 2021 Elsevier B.V. All rights reserved.