The Macroeconomic Effects of Corporate Tax Reforms

Introduction

Taxes paid by companies are a key source of government revenue. Among OECD countries, corporate taxes in 2018 accounted for an average of 10% of total tax revenue, 3.1% of GDP, and 5.7% of gross business profits. Beyond their importance for fiscal revenue, corporate taxes have large economic effects through their impact on private investment, a key driver of short-run fluctuations and long-run growth. Moreover, recent developments revived the interest in corporate taxation, including the massive debts accumulated during the pandemic, the exhaustion of monetary policy, the secular increase in business profits, and tax competition.

Research Objectives

I will develop and apply new structural frameworks to assess the macroeconomic impact of corporate tax reforms on:

1. Business cycle fluctuations
2. Capital misallocation
3. Capital valuation

Relative to the literature, my investigation integrates important dimensions that have not been jointly examined before due to their complexity, including:

1. The interaction of corporate taxes and empirically relevant investment frictions
2. The richness of firm heterogeneity in the microdata
3. The general equilibrium feedback and dynamic effects that differentiate short and long-run responses
4. The relationship with monetary policy

I will apply methodological advances that I recently developed which overcome the technical challenges and allow me to contribute to the state-of-the-art by incorporating all of these dimensions into the analysis.

Project Structure

Part I

Part I develops the theory to formalize how corporate taxes determine macroeconomic outcomes and conduct counterfactuals.

Part II

Part II combines the theory with cross-country data to provide systematic evidence on the impact of corporate tax reforms, organize the historical experience, and derive policy recommendations.

Part III

Part III examines how the corporate tax regime mediates the effects of monetary policy, and how the stance of monetary policy shapes the effects of tax reforms.