Working Paper: NBER ID: w16588
Authors: Ellen R. McGrattan
Abstract: Previous studies of the U.S. Great Depression find that increased taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, and excess and undistributed profits predicts patterns of output, investment, and hours worked more like those in the 1930s than found in earlier studies. The greatest effects come from the increased tax on corporate dividends.
Keywords: capital taxation; Great Depression; economic activity; neoclassical growth model
JEL Codes: E13; E32; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased capital taxation during the Great Depression (F38) | significant contribution to the economic downturn and slow recovery (F65) |
| higher taxes on corporate dividends (G35) | substantial decline in tangible investment (E22) |
| substantial decline in tangible investment (E22) | decline in GDP (E20) |
| substantial decline in tangible investment (E22) | decline in hours worked (J22) |
| rise in effective tax rates on dividends (H29) | reduced business investment (G31) |
| undistributed profits tax (H29) | sharp decline in investment (E22) |
| anticipated future tax increases (H29) | immediate adjustments in distributions and investment decisions by businesses (G31) |
| rising tax rates (H29) | decline in equity values (G12) |