Thread by @SGechert

Paper alert: @heimbergecon +I investigate: Do corporate tax cuts boost economic growth? There is a growing empirical literature. As often, studies come to ambiguous conclusions: corporate tax cuts increase,reduce, or do not signif. affect growth. Thread: boeckler.de/de/faust-detai…

This is a classic partisan fiscal policy debate. One camp claims that tax cuts improve profit margins which will spur investment and thus growth+jobs. The other doubts that higher profits will lead to more investment and claims that the tax revenues could be used more effectively

Former Pres. #Trump promoted the #TCJA, which entailed a large corporate tax cut, insisting on huge growth effects. The #Biden admin. now argues for reversal: funds should better be used for public investment instead. @WhiteHouseCEA

https://twitter.com/WhiteHouseCEA/status/1392944212010807296?s=20

Debates in other countries are similarly divided along party lines. E.g. in GER, the business friendly @fdp calls for a large corporate tax cut to grow out of the #Corona crisis. Left-leaning parties side with #Biden and call for more public investment.

https://twitter.com/nickscharioth/status/1392421661509623808?s=20

What does theory say?In the simple neoclassical Solow growth model, long run growth comes from exogenous technical change. Tax policy can “only” influence the GDP level+transition to steady state growth. Lower corporate taxes foster saving + investment -> imply higher GDP levels

In more recent endogenous growth models, corporate tax cuts can also positively impact on the long-term growth rate via spurring factor productivity + innovation. Due to shifts in tax incidence, according to some standard models, the optimal corporate tax rate should thus be 0.

Other papers have argued that capital taxation can promote economic growth by shifting the tax burden away from labor taxation or by financing productive government spending. However, the dominant prediction that has guided empirical work is that corporate tax cuts boost growth.

The empirical literature is also split. There are studies that show positive, negative or insignificant effects of corporate tax cuts on growth. Relevant factors are how studies measure tax changes (e.g. statutory vs effective vs share in GDP), …

… tackling endogeneity issues (because growth affects tax revenues), focusing on short vs long-term effects, country selection, controlling for other budgetary components (other taxes and spending), etc.

So what is our contribution? We collect all the empirical evidence (we found 42 studies that give 441 estimates of the relation, together with the likely influential factors). We then try to filter out an underlying effect of corporate taxes on growth by #metaanalysis techniques.

If we calculate the unweighted average across all studies, a cut to corporate tax rates of 1pp would foster growth by ca 0.02 pp p.a. - a moderate yet significant effect.But there may be publication selection bias: authors+editors may prefer theory-consistent+significant results.

This can be detected by an unduly correlation between the estimate and its standard error. We find a negative relation, meaning that growth effects of tax cuts are overstated. If we control for this influence, essentially no effect of corporate tax cuts on growth rates remains.

This finding is confirmed by several non-linear techniques of detecting publication selection bias. All our estimates find an insignificant close to 0 effect.

See this stunning graph based on Isaiah Andrews + @maxkasy ‘s method (HT, maxkasy.github.io/home/code-and-…) : it is 4 to 5 times more likely to publish a statistically significant (10 or 5% level) growth-enhancing effect of a corporate tax cut than an insignificant effect.

What if we control for study characteristics? 1.There is no robust difference between the various ways to measure corporate tax changes or different estimation techniques. 2. country samples (OECD vs. nonOECD) do not seem to make a difference. 3.More recent studies tend to find…

less growth enhancing effects. and 4.controlling for government spending seems relevant: tax cuts are slightly more beneficial to growth if govt spending is not cut at the same time. This resonates with the theoretical argument above. Central: the 0-effect remains after controls.

We conclude that the attention that corporate taxation has received in debates on structural economic reforms for economic growth seems exaggerated. Corporate tax cuts stimulated international tax competition

https://twitter.com/heimbergecon/status/1351060044285161478?s=20

but do not seem to promote economic growth.

CC: @heimbergecon , @sdullien, @D_Langenmayr @jsuedekum, @YohannesBecker @AchimTruger @BachmannRudi , @HBoushey , @DeanBaker13 , @econjared , @WhiteHouseCEA , @Otto_Fricke , @Lars_Feld , @FuestClemens , @W_Schmidt_ @MartinGreive @chris_breu @boeckler_de Thanks for sharing.