Working Paper: CEPR ID: DP13073
Authors: Petr Sedlacek; Vincent Sterk
Abstract: The 2017 Tax Cuts and Jobs Act slashed tax rates on business income and introduced immediate expensing of investments. Using a quantitative heterogeneous firms model, we investigate the long-run effects of such tax reforms on firm dynamics. We find that they can substantially increase business dynamism, potentially offsetting the large decline in the U.S. startup rate observed over recent decades. This result is driven by indirect equilibrium forces: the tax reform stimulates firm entry, leading to an increase in labor demand and wages, which in turn makes firm selection more stringent. Related to this is a large boost of the number of firms and of aggregate output, investment and employment.
Keywords: taxation; business dynamism; aggregate productivity
JEL Codes: D21; E22; E24; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 2017 Tax Cuts and Jobs Act (TCJA) (K34) | business dynamism (P12) |
| 2017 Tax Cuts and Jobs Act (TCJA) (K34) | firm entry (M13) |
| firm entry (M13) | labor demand (J23) |
| labor demand (J23) | wages (J31) |
| wages (J31) | firm selection (L10) |
| 2017 Tax Cuts and Jobs Act (TCJA) (K34) | firm values (G32) |
| firm values (G32) | new entries (Y90) |
| 2017 Tax Cuts and Jobs Act (TCJA) (K34) | user cost of capital (G31) |
| user cost of capital (G31) | exits (Y60) |
| 2017 Tax Cuts and Jobs Act (TCJA) (K34) | aggregate output (E10) |
| 2017 Tax Cuts and Jobs Act (TCJA) (K34) | investment (G31) |
| 2017 Tax Cuts and Jobs Act (TCJA) (K34) | employment (J68) |