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The Role of Taxes in the Disconnect between Corporate Performance and Economic Growth

Author

Listed:
  • Urooj Khan

    () (Columbia University)

  • Suresh Nallareddy

    () (Duke University)

  • Ethan Rouen

    () (Harvard Business School, Accounting and Management Unit)

Abstract

We investigate the relation between the growth in corporate profits and the overall U.S. economy, focusing on the impact of the U.S. corporate tax regime on this relation. We document that the growth of corporate profits, on average, has outpaced the growth of the economy and this disconnect increases as the difference between the corporate income tax rate of the U.S. and the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.

Suggested Citation

  • Urooj Khan & Suresh Nallareddy & Ethan Rouen, 2017. "The Role of Taxes in the Disconnect between Corporate Performance and Economic Growth," Harvard Business School Working Papers 18-006, Harvard Business School.
  • Handle: RePEc:hbs:wpaper:18-006
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Taxes; economic growth; GDP; corporate profits; American Jobs Creation Act of 2004;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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