Research finds that goods producers respond to corporate tax cuts by increasing their capital expenditure and employment
Last year, I wrote about a paper by economists by economists James Cloyne, Joseba Martinez, Haroon Mumtaz, and Paolo Surico which found that:
A corporate income tax cut leads to a sustained increase in GDP and productivity, with peak effects between five and eight years. R&D spending and capital investment display hump-shaped responses while hours worked and employment are much less affected.
A new paper by two of those economists, James Cloyne, Ezgi Kurt, and Paolo Surico, titled “Who Gains from Corporate Tax Cuts?” digs into that a little deeper.
The authors note that “despite their [political] popularity, relatively little is known about which group(s) end up winning or loosing from corporate tax changes. Workers? Shareholders?” Using “U.S. firm level data, while also capturing general equilibrium effects that might lead some firms, sectors or groups to benefit more than others indirectly,” they “estimate the effects of changes in U.S. federal corporate income tax rates and the investment tax credit on a range of firm outcomes.”
“Our main finding,” they write:
…is that corporate tax cuts generate a significant boost in investment and employment for the economy overall, but the benefits are spread unevenly across sectors and groups. In particular, goods producing companies —such as manufacturing firms— expand both capital expenditure and wage bills following a cut in corporate taxes, but do not alter dividend payments. In contrast, firms in the service sector —which are far less capital-intensive— do not increase investment or employment at all but use most of their windfall to pay dividends. In short, we find important differences in the effect on workers vs. shareholders across sectors of the economy.
This is supported by the findings of another new paper by economists Sebastian Link, Manuel Menkhoff, Andreas Peichl, and Paul Schüle which examines “a representative sample of German manufacturing firms” to “study how tax hikes induce firms to revise their investment decisions.” They find that:
On average, the share of firms that invest less than previously planned increases by three percentage points after a tax hike. This effect is twice as large during recessions.
Corporate tax hikes are often painted as a way of getting “the rich” to pay their “fair share.” Research shows that it doesn’t do that, but, as this new research shows, that failure comes with a substantial economic cost to the manufacturing industry especially.