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PublicationThe Tax Cuts and Jobs Act’s Incorporation “Incentive”(2019-10-28) Knoll, Michael S.; Knoll, Michael S.Many observers have asserted that the reduced corporate tax rate instituted by the 2017 Tax Cuts and Jobs Act (TCJA) has transformed entity choice for business owners, incentivizing owners of businesses structured as sole proprietorships or passthrough entities to incorporate their businesses and to use these new corporations as pocketbook investment vehicles to invest in and hold portfolio investments, substantially reducing wealthy individuals’ tax obligations and Treasury’s tax collections. This brief offers a different view, and discusses why predictions of widespread conversions to the corporate form at a substantial cost to the fiscal position of the U.S. are overstated. The brief explores the various purported tax advantages to incorporating, both when business owners are looking to invest substantial profits in portfolio assets, as well as when retained earnings are reinvested in the business and produce ordinary income. PublicationS Corp ESOP Legislation Benefits and Costs: Public Policy and Tax Analysis(2008-07-29) Freeman, Steven F; Knoll, Michael; Freeman, Steven F; Knoll, MichaelSamuel Zell’s acquisition of the Tribune Company in December 2007 using an S corporation employee stock ownership plan (S ESOP) brought S ESOPs to national attention. An S ESOP is a trust that holds shares of an S corporation (a closely held corporation whose shareholders are taxed on a pass-through basis similarly to partners in a partnership) for the benefit of the corporation’s employees. S ESOPs, which have only existed since 1998 are not as well known as C ESOPs, an ESOP that holds shares of a C corporation (a separately taxed corporation). Enron, Polaroid and United Airlines, all of which had ESOPs when they went bankrupt, were C corporations. Perhaps because they have only existed for ten years, little academic attention has focused on S ESOPs. In this paper we draw on the extensive existing employee ownership literature to describe the benefits and costs to employees, to firms and to society at large from the legislation that authorizes S ESOPs, and, where possible, we quantify these costs and benefits. We estimate that annual contributions to S ESOPs on behalf of employees total $14 billion, which represent additional compensation that would not have been paid without an ESOP. Annual gains attributable to increased job stability also save employees approximately $3 billion annually. Accumulated stakes, which are essentially forced savings and usually do not displace other savings, lead to additional annual accruals of $34 billion. Employers pay for ESOP contributions out of firm-level productivity and sales gains of $33 billion annually attributable to employee ownership. We estimate that one quarter of the annual gain, $8 billion ultimately goes to the federal treasury, which thereby also benefits from the adoption of S ESOPs. PublicationBefore International Tax Reform, We Need to Understand Why Firms Invert(2017-09-01) Knoll, Michael; Knoll, MichaelA wave of corporate inversions by U.S. firms over the past two decades has generated substantial debate in academic, business, and policy circles. The core of the debate hinges on a couple of key economic questions: Do U.S. tax laws disadvantage U.S.-domiciled companies relative to their foreign competitors? And, if so, do inversions improve the competitiveness of U.S. multinational firms both abroad and at home? This brief, summarizes both old and new research that views these questions through the lens of corporations’ global effective tax rates (ETRs), and finds that the stronger case seems to be that U.S.-domiciled corporations are often tax-disadvantaged and that they can improve their competitive position by inverting. Additional evidence also suggests that U.S. MNCs can increase their after-tax cash flow by inverting. Inversions indicate that something is fundamentally wrong with the tax system. The brief concludes by discussing two feasible paths forward for reform.