Patrick Kennedy, UC Berkeley Graduate Student, UC Berkeley Economics
Abstract: This paper studies the effects of historically large federal corporate income tax cuts on U.S. firms and workers, leveraging quasi-experimental policy variation from the 2017 law known as the Tax Cuts and Jobs Act. To identify causal effects, we use employer-employee matched federal tax records and a difference-in-differences design comparing similar firms that faced divergent tax changes due to their pre-existing legal status. We find that reductions in marginal income tax rates increase sales, pre-tax profits, investment, and workers’ annual earnings. Earnings gains are concentrated in executive pay and in the top 10% of the within-firm income distribution, while workers in the bottom 90% of the distribution see no change in earnings. We estimate that approximately 15% of the increase in executive pay is attributable to improved firm performance, and 85% is due to rent-sharing. Exploiting differential exposure to tax cuts at the industry-level, we find suggestive evidence of market-level adjustments that amplify the positive effects on investment, but no evidence of market-level earnings adjustments. Overall, the results imply that corporate tax cuts improve aggregate economic efficiency but exacerbate inequality.