Short-Term Tax Cuts, Long-Term Stimulus

We study the macroeconomic effects of corporate income taxes on innovation and productivity in the United States. Using narrative-identified tax changes from 1950 to 2019, we find that temporary cuts in corporate tax rates lead to persistent increases in R&D, patenting, productivity, output, and broader measures of intangible investment. We interpret these findings with an estimated semi-endogenous growth model, whose implied sufficient statistics for innovation policy, elasticities of patenting with respect to taxes and social returns to R&D are consistent with the existing literature. The model highlights the tax amortization of intangible asset purchases as a key channel through which corporate taxes distort innovation. We provide direct evidence for the model mechanism using firm-level data: a cut in corporate taxes leads to a relative jump in the stock market valuation of the most intangible-intensive companies, followed by a sustained increase in R&D, intangible investment, and patenting, among these firms. Our results suggest that corporate income taxes create a first-order distortion to innovation and that the tax treatment of intangible assets is central to understanding the effects of corporate taxation.