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

Alexander Ljungqvist, Michael Smolyansky

NBER Working Paper No. 20753
Issued in December 2014, Revised in October 2018
NBER Program(s):Economic Fluctuations and Growth, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w20753

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