CefES Working Papers

Corporate Taxes, Productivity, and Business Dynamism

by Andrea Colciago (University of Milan-Bicocca, De Nederlandsche Bank - Research Department), Vivien Lewis (Deutsche Bundesbank & CEPR), and Branka Matyska (CERGE-EI))


We identify the effects of corporate income tax shocks on key US macroeco- nomic aggregates. In response to a corporate income tax cut, we find that: (i) labor productivity increases; (ii) entry increases with delay; (iii) exit increases; (iv) total labor increases by more than production labor. To rationalize these empirical findings, we build a New Keynesian model with idiosyncratic firm productivity, and entry and exit. Our model features productivity gains due to selection and cleansing along the entry and exit margins. Models with homogeneous firms fail to account for the selection and cleansing process and produce counterfactual results.