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

58 Pages Posted: 11 Dec 2014 Last revised: 8 Oct 2018

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Stockholm School of Economics; 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: October 3, 2018

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: Fiscal policy, Corporate taxation, Economic stimulus, Economic growth, Employment, Regional economies

JEL Classification: H2, E6

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander and Smolyansky, Michael, To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income (October 3, 2018). Available at SSRN: https://ssrn.com/abstract=2536677 or http://dx.doi.org/10.2139/ssrn.2536677

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Michael Smolyansky

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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