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.