NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Michael Smolyansky

Federal Reserve Board
20th & C St., NW
Washington, DC 20551

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Federal Reserve Board

NBER Working Papers and Publications

December 2014To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income
with Alexander Ljungqvist: w20753
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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