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Corporate Tax Cuts and the Decline of the Labor Share

Baris Kaymak and Immo Schott

No 943, 2018 Meeting Papers from Society for Economic Dynamics

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.

New Economics Papers: this item is included in nep-dge and nep-pbe
Date: 2018
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