Corporate Tax Cuts and the Decline of the Labor Share

By Baris Kaymak and Immo Schott

http://d.repec.org/n?u=RePEc:red:sed018:943&r=dge

We document a strong empirical connection between corporate taxation and the labor’s share of income in the manufacturing sector across OECD countries. The estimates indicate that the decline in corporate taxes is, on average, associated with 40% of the observed decline in labor’s share. We then present a model of industry dynamics where firms differ in their capital intensity as well as their productivity. A drop in the corporate tax rate reduces the labor share by shifting the distribution of production towards capital intensive firms. Industry con- centration rises as a result, and firm entry falls, consistent with the US experience documented in Kehrig and Vincent (2017) and Autor et al. (2017). Calibration of the model to the US economy indicates that corporate tax cuts explain at least a third of the decline in labor’s share in the US manufacturing industry.

The secular(?) decline in the labor income share is cause for a a lot of speculation, especially as it seems to happens in several countries simultaneously. This paper presents an interesting take at this question: it is to a good part due to declining corporate tax rates and the ensuing market concentration. The narrative makes sense and the numbers seem to back it up well.

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