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No. 970: The Dynamic Effects of Income Tax Changes in a World of Ideas

James Cloyne University of California Davis, NBER and CEPR Joseba Martinez London Business School and CEPR Haroon Mumtaz Queen Mary, University of London Paolo Surico London Business School and CEPR

December 1, 2023

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Abstract

Using a narrative identification of US tax changes over the post-WWII period, we show that corporate income tax cuts foster R&D spending and innovation, leading to a persistent increase in aggregate productivity and output. In contrast, changes in the average personal income tax rate have mostly short-term e ects. An estimated endogenous productivity model highlights the
role of "applied research" - over and above formal R&D - as a main force behind these results, and suggests a social rate of return to investment in innovation between 20% and 75%.

 

J.E.L classification codes: E23, E62, O32, O34, O38

Keywords: corporate taxes, narrative identification, TFP, R&D, technological adoption.

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