The U.S. Corporate Tax Reform and Its Macroeconomic Outcomes

Abstract

The corporate tax reform has been among the most controversial issues during the past U.S. presidential debates. Though much has been said about the adverse macroeconomic effects of the corporate tax hike, less attention has been paid to the magnitude of such effects. This study attempts to measure the adverse effects of the corporate tax hike on macroeconomic variables such as investment, real GDP, productivity growth, hourly wages, unemployment rate, natural rate of unemployment, and consumer price index (CPI). The estimated regression results with quarterly data from1960 to 2010suggest that a 10% increase in the effective corporate tax rate reduces private investment by3.1%, real GDP by 1.5%, productivity by 2.6%, and hourly wages by 4%. The results also indicate that this increase in the effective corporate tax rate raises short-term unemployment rate by 0.5%, the natural rate of unemployment by 1%, and the consumer price index (CPI) by 0.9%.