DOES LOWER CORPORATE INCOME TAX PROMOTE PRIVATE INVESTMENT?

Abstract

ABSTRACT The general argument offered by the supporters of trickledown economics is that any cut in corporate income tax will raise per-unit profit to investors encouraging them to increase investment leading to the increase in real output. The increase in real output then will subsequently raise the demand for labor resulting in the rise in wage rate and the standard of living for workers. This study tests the validity of the theory on US data from 1990 to 2020. We apply the vector autoregressive model on our model variables INV (gross private domestic investment) and HCIT (highest rate of corporate income tax). In the equation with INV as the dependent variable and the lagged values of INV and HCIT as independent variables, the coefficients associated with the independent variables, and were found to be statistically insignificant which implied that any change in highest corporate income tax would have no effect on gross private domestic investment thereby invalidating the so-called trickledown economics. Keywords Trickledown economics, corporate income tax, investment, VAR, etc.