The role of taxes in the disconnect between corporate performance and economic growth

Journal Article (Journal Article)

We investigate the relation between corporate performance and overall economic growth in the United States. In particular, we focus on the impact of the U.S. corporate tax regime on this relation. Exploiting time-series variation and a tax shock, we document that the relatively higher corporate income tax rate and the tax treatment of foreign earnings of U.S. corporations have contributed to a disconnect between the performance of the corporate sector and the overall economy. Specifically, the growth of domestic (national) corporate profits, on average, has outpaced the growth of the domestic (national) economy, and this disconnect increases as the difference between the U.S. corporate income tax rate and the average tax rate of the other Organisation for Economic Co-operation and Development countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.

Full Text

Duke Authors

Cited Authors

  • Khan, U; Nallareddy, S; Rouen, E

Published Date

  • November 1, 2020

Published In

Volume / Issue

  • 66 / 11

Start / End Page

  • 5427 - 5447

Electronic International Standard Serial Number (EISSN)

  • 1526-5501

International Standard Serial Number (ISSN)

  • 0025-1909

Digital Object Identifier (DOI)

  • 10.1287/mnsc.2019.3350

Citation Source

  • Scopus