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Corporate Tax Policy and Productivity Growth

Corporate Tax Policy and Productivity Growth published on

An article by Colin Davis and Ken-ichi Hashimoto in the latest Economic Inquiry seems relevant to the current GOP tax reform proposals. The paper, titled “Corporate Tax Policy and Industry Location with Fully Endogenous Productivity Growth,” purports to show the effects of differential corporate tax policy on business location choice, productivity and innovation. The abstract follows:

This paper considers how national corporate tax policy affects productivity growth through adjustments in geographic patterns of industry in a two-country model of trade. With trade costs and imperfect knowledge spillovers between countries, production concentrates partially and innovation concentrates fully in the country with the lowest tax rate. A rise in the international corporate tax differential accelerates productivity growth through an increase in the production share of the low-tax country that improves knowledge spillovers from industry to innovation. The paper also investigates the relationship between the corporate tax differential and the level of market entry, and analytically characterizes the effects of changes in tax policy on national welfare.

Given the U.S. has one of the highest corporate tax rates among developed nations, the results of this study would seem to support efforts to lower that tax rate to be more in line with international peers. And lest the result seem too politically convenient, an ungated copy of an earlier draft of the paper (from 2015) is available here.

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