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Corporate Tax Cuts and the Decline of the Labor Share

Author

Listed:
  • Baris Kaymak

    (Universite de Montreal)

  • Immo Schott

    (Université de Montréal)

Abstract

We document a strong empirical connection between corporate taxation and the labor’s share of income in the manufacturing sector across OECD countries. The estimates indicate that the decline in corporate taxes is, on average, associated with 40% of the observed decline in labor’s share. We then present a model of industry dynamics where firms differ in their capital intensity as well as their productivity. A drop in the corporate tax rate reduces the labor share by shifting the distribution of production towards capital intensive firms. Industry con- centration rises as a result, and firm entry falls, consistent with the US experience documented in Kehrig and Vincent (2017) and Autor et al. (2017). Calibration of the model to the US economy indicates that corporate tax cuts explain at least a third of the decline in labor’s share in the US manufacturing industry.

Suggested Citation

  • Baris Kaymak & Immo Schott, 2018. "Corporate Tax Cuts and the Decline of the Labor Share," 2018 Meeting Papers 943, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:943
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    File URL: https://economicdynamics.org/meetpapers/2018/paper_943.pdf
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    References listed on IDEAS

    as
    1. Matthias Kehrig & Nicolas Vincent, 2018. "The Micro-Level Anatomy of the Labor Share Decline," NBER Working Papers 25275, National Bureau of Economic Research, Inc.
    2. Autor, David & Dorn, David & Katz, Lawrence F. & Patterson, Christina & Van Reenen, John, 2017. "The fall of the Labor share and the rise of superstar firms," LSE Research Online Documents on Economics 83616, London School of Economics and Political Science, LSE Library.
    3. Brent Neiman, 2014. "The Global Decline of the Labor Share," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 61-103.
    4. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    5. Gravelle, Jane G., 2004. "The Corporate Tax: Where Has It Been and Where Is It Going?," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(4), pages 903-923, December.
    6. Matthias Kehrig & Nicolas Vincent, 2017. "Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline," CESifo Working Paper Series 6454, CESifo Group Munich.
    7. Matthias Kehrig & Nicolas Vincent, 2017. "Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline," CESifo Working Paper Series 6454, CESifo Group Munich.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Corporate Tax Cuts and the Decline of the Labor Share
      by Christian Zimmermann in NEP-DGE blog on 2018-10-14 03:13:21

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    Cited by:

    1. Satyajit Chatterjee & Burcu Eyigungor, 2019. "The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World," Working Papers 19-18, Federal Reserve Bank of Philadelphia, revised 14 Mar 2019.
    2. Akcigit, Ufuk & Ates, Sina T., 2019. "What Happened to U.S. Business Dynamism?," CEPR Discussion Papers 13669, C.E.P.R. Discussion Papers.
    3. Ufuk Akcigit & Sina T. Ates, 2019. "Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory," NBER Working Papers 25755, National Bureau of Economic Research, Inc.

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