The Role of Taxes in the Disparity between Corporate Performance and Economic Growth

Abstract

We investigate the impact of the corporate tax regime in the United States on the relation between the performance of U.S. corporations and the overall economy. Exploiting time-series variation, a tax shock, and cross-country and cross-sectional variation, we document that the relatively higher corporate income tax rate and the tax treatment of foreign earnings of U.S. corporations have contributed to fewer corporate profits translating into overall economic growth. These features of the U.S. tax regime result in fewer corporate profits being channeled to subsequent domestic investments, leading to lower economic growth. Our findings have implications for policy setters.