The Macroeconomic Effects of Corporate Tax Reforms

TL;DR

This paper analyzes the differing macroeconomic impacts of two major U.S. corporate tax reforms, revealing how depreciation policies and sector structures influence their effectiveness on output and investment.

Contribution

It introduces a neoclassical growth model incorporating depreciation and pass-through sectors to explain the varied effects of tax cuts.

Findings

Kennedy's tax cuts increased output and investment with minimal payouts.

The TCJA-17 led to large payouts but only modest economic stimulus.

Accelerated depreciation and pass-through sectors dampen tax cut effects.

Abstract

Using aggregate, sectoral, and firm-level data, this paper examines the effects of two major U.S. corporate tax cuts. The Tax Cuts and Jobs Act (TCJA-17) led to large shareholder payouts but modest aggregate stimulus, while Kennedy's 1960s tax cuts stimulated output and investment with minimal payout impact. To explain this divergence, I incorporate tax depreciation policy and a pass-through business sector into a neoclassical growth model. The model suggests that accelerated depreciation and a large pass-through share dampen stimulus from corporate tax rate reductions, and that Kennedy's cuts boosted output four times more per dollar of lost revenue than the TCJA-17.