Working Paper: NBER ID: w30246
Authors: James Cloyne; Joseba Martinez; Haroon Mumtaz; Paolo Surico
Abstract: We study the persistent effects of temporary changes in U.S. federal corporate and personal income tax rates using a narrative identification approach. A corporate income tax cut leads to a sustained increase in GDP and productivity, with peak effects between five and eight years. R&D spending and capital investment display hump-shaped responses while hours worked and employment are much less affected. In contrast, personal income tax cuts trigger a short-lived boost to GDP, productivity and hours worked but have no long-term effects. We develop and estimate an endogenous growth model with variable factor utilization and show that these features generate a pro-cyclical response of productivity which is key to account for our empirical findings.
Keywords: tax cuts; GDP; productivity; R&D spending; narrative identification
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 cut (H25) | GDP (E20) |
| Corporate income tax cut (H25) | Productivity (O49) |
| Corporate income tax cut (H25) | R&D spending (O32) |
| Corporate income tax cut (H25) | Capital investment (E22) |
| Personal income tax cut (H24) | GDP (E20) |
| Personal income tax cut (H24) | Productivity (O49) |
| Personal income tax cut (H24) | Hours worked (J22) |
| Personal income tax cut (H24) | R&D expenditure (O32) |
| Tax changes (H29) | Economic performance (P17) |