Corporate Tax Cuts Increase Income Inequality

45 Pages Posted: 9 May 2018

See all articles by Suresh Nallareddy

Suresh Nallareddy

Duke University - Fuqua School of Business

Ethan Rouen

Harvard Business School

Juan Carlos Suárez Serrato

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 7, 2018

Abstract

This paper studies the effects of corporate tax changes on income inequality. Using state corporate tax rate changes as a setting, we show that cutting state corporate tax rates leads to increases in income inequality. This result is robust to using regression and matching approaches, and to controlling for a host of potential confounders. Contrary to the effects of tax cuts, we find no effects of tax increases on income inequality at the state level. We then use data from the IRS Statistics of Income to explore the mechanism behind the rise in income inequality. We find tax cuts lead to higher reported capital income and a decrease in wage and salary income. These effects are concentrated among top earners, and we find no effects for those reporting less than $200,000 in income. This result provides evidence that one mechanism for the relation between tax cuts and inequality is that wealthy individuals shift their income to reduce taxes while others do not. Finally, we explore the effects of corporate tax cuts on capital investment using data from the Annual Survey of Manufactures. We find that tax cuts lead to an increase in real investment, suggesting a trade-off between investment and inequality at the state level.

Suggested Citation

Nallareddy, Suresh and Rouen, Ethan and Suárez Serrato, Juan Carlos, Corporate Tax Cuts Increase Income Inequality (May 7, 2018). Available at SSRN: https://ssrn.com/abstract=3174864 or http://dx.doi.org/10.2139/ssrn.3174864

Suresh Nallareddy

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Ethan Rouen (Contact Author)

Harvard Business School ( email )

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

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

Juan Carlos Suárez Serrato

Duke University - Department of Economics

Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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