Working Paper: NBER ID: w21534
Authors: Xavier Giroud; Joshua Rauh
Abstract: In a sample of over 27 million establishments of U.S. firms with activities in more than one state, we estimate the impact of state business taxation on business activity. Only firms organized as subchapter C corporations are subject to the corporate tax code, whereas the income of partnerships, sole-proprietorships, and S corporations is passed through annually to the firm's owners and taxed at individual rates. For C corporations, both employment at existing establishments (intensive margin) and the number of establishments in the state (extensive margin) have corporate tax elasticities of -0.4. Pass-through entities, which serve as a control group for the corporate tax reforms, respond only to the personal tax code, with tax elasticities of -0.2 to -0.3. Around half of the effects are driven by reallocation of productive resources to other states where the treated firms have establishments. Capital shows similar patterns but is 36% less elastic than labor. A narrative approach confirms that the results are robust and strongest in the sample of tax changes that were implemented due to inherited budget deficits, long-run goals, or cross-state variation caused by Federal tax reforms.
Keywords: State taxation; Business activity; C corporations; Passthrough entities; Establishment-level data
JEL Codes: H25; H71; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| state corporate tax rate increase (H79) | decrease in establishments per C corporation (L20) |
| state personal tax rate increase (H79) | closure of establishments for passthrough entities (H24) |
| state corporate tax rate increase (H79) | decrease in employment for C corporations (G39) |
| state personal tax rate increase (H79) | decrease in employment for passthrough entities (H32) |
| tax changes in other states (H79) | offset observed effects (C22) |