To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income

61 Pages Posted: 11 Dec 2014 Last revised: 10 May 2016

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Michael Smolyansky

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: May 8, 2016

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 income. We find little evidence that corporate tax cuts boost economic activity, unless implemented during recessions when they lead to significant increases in employment and income. 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: Fiscal policy, Corporate taxation, Economic stimulus, Economic growth, Employment, Regional economies

JEL Classification: H2, E6

Suggested Citation

Ljungqvist, Alexander and Smolyansky, Michael, To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income (May 8, 2016). Available at SSRN: https://ssrn.com/abstract=2536677 or http://dx.doi.org/10.2139/ssrn.2536677

Alexander Ljungqvist (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Belgium

Research Institute of Industrial Economics (IFN) ( email )

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Stockholm, SE-102 15
Sweden

Michael Smolyansky

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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