Working Paper: NBER ID: w20753
Authors: Alexander Ljungqvist; Michael Smolyansky
Abstract: Do corporate tax increases destroy jobs? And do corporate tax cuts boost employment? Answering these questions has proved empirically challenging. We propose an identification strategy that exploits variation in corporate income tax rates across U.S. states. Comparing contiguous counties straddling state borders over the period 1970 to 2010, we find that increases in corporate tax rates lead to significant reductions in employment and wage income, while corporate tax cuts only boost economic activity if implemented during recessions. Our spatial-discontinuity approach permits a causal interpretation of these findings by both establishing a plausible counterfactual and overcoming biases resulting from the fact that tax changes are often prompted by changes in economic conditions.
Keywords: Corporate Taxation; Employment; Income; Economic Activity
JEL Codes: E3; E62; H2; H25; H31; H32; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate tax increase (H29) | Decrease in employment (J63) |
| Corporate tax increase (H29) | Decrease in total wage income (J31) |
| Corporate tax cuts during recessions (H32) | Increase in employment (J23) |
| Corporate tax cuts during recessions (H32) | Increase in total wage income (J31) |
| Tax increases (H29) | Negative impacts on employment and income (F66) |
| Tax increases in states with low corporate tax rates (H25) | More pronounced negative effects (D62) |