Corporate Income Taxes and (Un-)Employment in the OECD

Antonio Estache and Beni Kouevi Gath

No 2019-11, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: This paper assesses how corporate income tax rate (CITR) changes and the aggregate unemployment rate are related in the OECD. The analysis is based on a sample of 20 OECD countries over the period 1999 to 2014. In contrast to earlier cross-country research, we account explicitly for differences in labor market policies and institutions. The main result is that, on average, a CITR cut is associated with an increase in the unemployment rate. This implies that, for this sample, the substitution effect of the tax rate cut on jobs dominates its output effect. This is consistent with a significant switch to less labor intensive capital which is not compensated by a new demand induced by the output effect of the tax cut. Labor market and structural characteristics differences across countries explain differences in the relative strength of these two effects. We also find that differences in reactions to the 2008 Subprime crisis also impacted the relative size of these two effects.

Keywords: corporate taxation; fiscal policies (search for similar items in EconPapers)
Pages: 20 p.
Date: 2019-03
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-pub
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