Corporate Tax Cuts and the Decline of the Manufacturing Labor Share

73 Pages Posted: 27 Dec 2022

See all articles by Barıș Kaymak

Barıș Kaymak

Federal Reserve Bank of Cleveland; University of Montreal

Immo Schott

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2022

Abstract

We document a strong empirical connection between corporate taxation and the manufacturing labor share, both in the US and across OECD countries. Our estimates associate 30 percent to 60 percent of the observed decline in labor shares with the fall in corporate taxation. Using an equilibrium model of an industry where firms differ in their capital intensities, we show that lower corporate tax rates reduce the labor share by raising the market share of capital-intensive firms. The tax elasticity of the labor share depends on the joint distribution of labor intensities and value added at the micro level. Given the empirical distribution in the US manufacturing sector, our quantitative analysis suggests that corporate tax cuts explain a significant part of the decline in the manufacturing labor share since the 1950s. The shift away from traditionally large, labor-intensive production units raised the concentration of market shares and reduced the concentration of employment.

Keywords: Labor Share of Income, Corporate Taxation, Industry Dynamics, Firm Size Distribution

JEL Classification: E25, H32, L11, L60

Suggested Citation

Kaymak, Barıș and Schott, Immo, Corporate Tax Cuts and the Decline of the Manufacturing Labor Share (December 20, 2022). FRB of Cleveland Working Paper No. 22-39, https://doi.org/10.26509/frbc-wp-202239, Available at SSRN: https://ssrn.com/abstract=4312735

Barıș Kaymak (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

HOME PAGE: http://barkaymak.wordpress.com

University of Montreal

C.P. 6128 succursale Centre-ville
Montreal, H3C 3J7
Canada

Immo Schott

Board of Governors of the Federal Reserve System ( email )

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

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