Corporate Taxes and the Earnings Distribution: Effects of the Domestic Production Activities Deduction

85 Pages Posted: 5 Jan 2022

See all articles by Christine Dobridge

Christine Dobridge

Board of Governors of the Federal Reserve System

Paul Landefeld

Government of the United States of America - Joint Committee on Taxation

Jacob Mortenson

Joint Committee on Taxation, US Congress

Date Written: December, 2021

Abstract

This paper investigates how corporate tax changes affect workers’ earnings. We use a dataset of U.S. worker-level W-2 filings matched with corporate tax returns and study the implementation of the Domestic Production Activities Deduction (DPAD). We find the DPAD tax rate reduction has a substantial effect on the distribution of annual wage earnings within a firm. Earnings of workers at the top of their firm’s earnings distribution rise relative to those at the bottom of the distribution. We estimate a semi-elasticity of average earnings of 1.1 with respect to the DPAD marginal tax rate reduction, while the semi-elasticity of median earnings is notably smaller—0.5. Furthermore, we estimate a semi-elasticity of 1.3 at the 95th percentile of workers’ earnings and 2.7 at the 99th percentile. This trend of larger semi-elasticities at the top of the earnings distribution is especially pronounced for small firms. Looking at overall employment effects, we see no change overall, but the number of employees rises at small firms and declines at large firms. In contrast, we find that capital investment rises for large firms, suggesting that the DPAD also resulted in domestic capitallabor substitution for large corporations. Our paper has significant implications for assessing the progressivity of the U.S. tax code and for analyzing the effect of corporate tax policy changes on the U.S. income distribution.

Keywords: Corporate taxation, Earnings distribution, Employment, Investment

JEL Classification: D31, H22, H25, J31

Suggested Citation

Dobridge, Christine and Landefeld, Paul and Mortenson, Jacob, Corporate Taxes and the Earnings Distribution: Effects of the Domestic Production Activities Deduction (December, 2021). FEDS Working Paper No. 2021-81, Available at SSRN: https://ssrn.com/abstract=3997002 or http://dx.doi.org/10.17016/FEDS.2021.081

Christine Dobridge (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Paul Landefeld

Government of the United States of America - Joint Committee on Taxation

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Jacob Mortenson

Joint Committee on Taxation, US Congress ( email )

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

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