The Role of Taxes in the Disconnect between Corporate Performance and Economic Growth

48 Pages Posted: 8 Jan 2016 Last revised: 15 Feb 2019

See all articles by Urooj Khan

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Suresh Nallareddy

Duke University - Fuqua School of Business

Ethan Rouen

Harvard Business School

Date Written: February 10, 2019

Abstract

We investigate the relation between corporate performance and overall economic growth in the United States. In particular, we focus on the impact of the U.S. corporate tax regime on this relation. Exploiting time-series variation and a tax shock, we document that the relatively higher corporate income tax rate and the tax treatment of foreign earnings of U.S. corporations have contributed to a disconnect between the performance of the corporate sector and the overall economy. Specifically, the growth of domestic (national) corporate profits, on average, has outpaced the growth of the domestic (national) economy, and this disconnect increases as the difference between the U.S. corporate income tax rate and the average tax rate of the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.

Keywords: Taxes, economic growth, GDP, corporate profits, American Jobs Creation Act of 2004

JEL Classification: E20, H25, K34, O10, M40, M41

Suggested Citation

Khan, Urooj and Nallareddy, Suresh and Rouen, Ethan, The Role of Taxes in the Disconnect between Corporate Performance and Economic Growth (February 10, 2019). Columbia Business School Research Paper No. 16-6; Harvard Business School Accounting & Management Unit Working Paper No. 18-006. Available at SSRN: https://ssrn.com/abstract=2712582 or http://dx.doi.org/10.2139/ssrn.2712582

Urooj Khan (Contact Author)

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Suresh Nallareddy

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Ethan Rouen

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6275 (Phone)

HOME PAGE: http://www.ethanrouen.com

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