How Would Corporate Tax Reform Benefit Workers?

Reducing the tax on capital income by reducing the corporate tax rate would undoubtedly result in an increase in capital investment, most economists would agree. Bob Lucas, the nobel-prize winning economist at the University of Chicago, once remarked that reducing or eliminating taxation on capital income was the closest thing he has ever seen to a free lunch, in terms of the concomitant increase in investment and economic growth that would create.

However, in the debate over the current tax reform, few people have discussed the impact that a lower corporate tax rate would have on the labor market. In a research paper forthcoming in Tax Notes, Andrew Hanson of Marquette University and I look at the empirical literature that examines the impact that corporate taxation has on the labor market—an aspect of tax reform that is not as well understood.

Put broadly, there are two different channels through which a lower capital tax rate can impact labor market decisions. The first is via the substitution effect: a lower capital tax rate makes plant and equipment cheaper, so firms have an incentive to substitute capital for labor.

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