Working Paper: NBER ID: w24598
Authors: Suresh Nallareddy; Ethan Rouen; Juan Carlos Suarez Serrato
Abstract: We study the effects of corporate taxes on income inequality. Using state corporate taxes as a setting, we provide evidence that corporate tax cuts lead to increases in income inequality. This result is robust across regression, matching, and synthetic controls approaches, and to controlling for a host of potential confounders. We use Statistics of Income data from the IRS to explore mechanisms behind this result. We find tax cuts lead to higher income for both top and bottom earners, but the gains to capital income for top earners exceed the gains to total income for bottom earners. This result suggests that, while all earners appear to benefit from a corporate tax cut, the relation between tax cuts and inequality is positive, in part, because high income individuals shift their compensation to reduce taxes.
Keywords: Corporate Tax Cuts; Income Inequality; State Corporate Taxes
JEL Codes: H20; H22; H25; H70; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate tax cuts (H29) | Income inequality (D31) |
| 1 percentage point cut in corporate taxes (H32) | Share of income accruing to the top 1% (D33) |
| Corporate tax cuts (H29) | Gains in capital income for top earners (D33) |
| Corporate tax cuts (H29) | Modest increases for bottom earners (J31) |
| Corporate tax cuts (H29) | Shift in compensation structures favoring high-income individuals (J31) |
| Mechanical increase in income share for the top 1% due to tax cuts (E25) | Total increase in income inequality (D31) |
| Corporate tax cuts (H29) | Income relabeling and shifts from wage to capital income (E25) |