In search of the incidence of the corporate tax on employment and wages: evidence from U.S. state tax reforms
Date
2018
Authors
Kakpo, Eliakim, author
Cutler, Harvey, advisor
Pena, Anita, advisor
Li, Cher, committee member
Kroll, Stephan, committee member
Journal Title
Journal ISSN
Volume Title
Abstract
Several controversies emerged recently following a series of corporate inversions designed to minimize corporate tax liabilities. Moreover, secular stagnation and ever-decreasing levels of corporate tax collections by federal and state jurisdictions in the U.S contributed to the resurgence of a widespread interest in tax reform. To reduce corporate tax evasion and promote economic growth, policymakers passed the "Tax Cuts and Jobs Act" in 2017 which substantially reduced the corporate income tax rate. The opportunity of the reform remains a controversial debate across the political spectrum. This dissertation explores the experience of U.S. state policy changes related to the taxation of corporations to study the extent to which the tax is passed onto workers in the form of lower wages and employment in the short-run. The first chapter discusses the political economy of U.S. state corporate tax reforms. Using a unique dataset of state corporate tax rates, I observe that business tax changes are associated with tax competition, swings in economic cycles, and left-right political ideology. In contrast, long-term debt and budgetary pressures do not correlate with state corporate tax policies. Moreover, I document a regional heterogeneity and notice a slowdown in state tax changes after the Federal Reform Act of 1986. These findings matter for the empirics of corporate tax incidence, which is increasingly concerned with the endogeneity between tax reforms and other economic developments. The second chapter studies the responsiveness of wages and employment to state corporate tax changes in the presence of market concentration and combined reporting legislation. I exploit policy discontinuities at state borders by pairing counties in states featuring a tax change with their contiguous counterparts in control states. I observe that corporate tax cuts do not boost employment or wages while tax hikes reduce the growth of both. When controlling for market competition, I notice that the wage sensitivity to a tax hike decreases with the number of establishments and depends on legislation regarding corporate profit reporting rules. The third chapter evaluates the economic effects of a natural experiment created by the 2005 Ohio tax reform. The policy drastically reduced the corporate and personal income tax, as well as the property tax on machinery over the period 2006-2010. I observe several cross-sections of the Current Population Survey and compare groups of individuals in Ohio to similar individuals in (i) the Midwest and (ii) other U.S. states around the reform. Using a difference in difference identification approach, I conclude that the tax reform did not significantly boost wages and employment opportunities; but seems to have affected the reporting of self-employment earnings.
Description
Rights Access
Subject
employment
profit shifting
corporate tax
wages
market power