Abstract
Previous studies document the taxation effect on firms' organizational choice and the welfare losses associated with this organizational distortion. However, studies examining firms' organizational distortion due to Taiwan's tax system are rare. This study utilizes industry-level data from profit-making enterprise income taxes to estimate the tax effect on firms' organizational choice. The estimates reveal that the ratios of sales and taxable income in each organizational form are affected by the tax gaps between organizations, implying that the distribution of the firms' business activities among different organizations are affected by the tax gaps. Based on the estimates, this study also evaluates the efficiency of firms' organizational distortion from tax differentials between organizations and finds that the efficiency loss was substantial before the 1998 tax integration bur was lessened by the tax integration.