Finance and Economics Discussion Series (FEDS)
To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income
Alexander Ljungqvist and Michael Smolyansky
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 income. We find little evidence that corporate tax cuts boost economic activity, unless implemented during recessions when they lead to significant increases in employment and income. 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.
Keywords: Corporate taxation, economic growth, economic stimulus, employment, fiscal policy, regional economies
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