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To Cut or Not to Cut?

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To Cut or Not to Cut?

On the Impact of Corporate Taxes on Employment and Income

Federal Reserve Board,

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Corporate tax cuts may not always deliver the economic benefits that politicians and CEOs expect.

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Cut corporate tax rates, many pundits proclaim, and watch employment increase, personal incomes surge and economic growth accelerate. Not so fast, according to economists Alexander Ljungqvist and Michael Smolyansky, who analyzed data from US counties that share a state border. Their research reveals that a correlation does exist between lower corporate rates and stronger economic activity, job creation and higher incomes during recessionary periods, but not when economies are growing. As states compete with each other to persuade companies to stay or relocate, getAbstract urges executives and policy makers to explore this compelling report.

Summary

US corporations pay taxes at one of the highest nominal rates in the world. To avoid US taxes, some businesses turn to inversion schemes, while others park their profits in foreign accounts. As policy experts mull various ways to reform the tax code, it’s important to understand how tax increases and decreases affect jobs and incomes. But it can be hard to separate the impacts of changes in tax rates from the underlying economy. For instance, if taxes go up during an economic boom and down during a recession, it isn’t clear whether the tax change or the economic...

About the Authors

Alexander Ljungqvist is a professor at the Stern School of Business at New York University. Michael Smolyansky is an economist with the Federal Reserve Board of Governors.

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