Working Paper: CEPR ID: DP17455
Authors: James Cloyne; Joseba Martinez; Haroon Mumtaz; Paolo Surico
Abstract: Using a narrative identification of US tax changes over the post-WWII period, we show that corporate income tax cuts foster R&D spending and innovation, leading to a persistent increase in aggregate productivity and output. In contrast, changes in the average personal income tax rate have mostly short-term effects. An estimated endogenous productivity model highlights the role of “applied research” - over and above formal R&D - as a main force behind these results, and suggests a social rate of return to investment in innovation between 20% and 75%.
Keywords: TFP; Corporate Taxes; Narrative Identification; R&D; Technological Adoption
JEL Codes: E23; E62; H24; H25; H31; H32; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate income tax cuts (K34) | R&D spending (O32) |
| R&D spending (O32) | aggregate productivity (E23) |
| corporate income tax cuts (K34) | innovation (O35) |
| innovation (O35) | aggregate productivity (E23) |
| corporate income tax cuts (K34) | GDP (E20) |
| corporate income tax cuts (K34) | consumption (E21) |
| changes in average personal income tax rate (H29) | labor supply adjustments (J22) |
| changes in average personal income tax rate (H29) | productivity (O49) |
| changes in average personal income tax rate (H29) | output (C67) |