Job Market Paper

The Contribution of Declining Corporate Taxes to Deindustrialization

Did the decline in corporate taxation contribute to the declining manufacturing share observed across advanced economies? This article provides causal evidence that the answer is yes. Tax cut explains from 20% to 30% of the observed decline in manufacturing. I combine longitudinal administrative firm-level data from Germany with 8,000 local tax changes for identification. Using Difference-in-difference estimations, I show that local tax hikes (cuts) increase (decrease) the local manufacturing share. Firm-level results reveal that this is due to wage, employment, firm entry, and labor productivity in the service sector being more responsive to a tax shock than in manufacturing. With this evidence in mind, I calibrate a two-sector model with heterogeneous firms and profit tax to show that, owing to different structural parameters, a corporate tax cut disproportionately benefits service firms, contributing to the sectoral reallocation from manufacturing to service.

Publication

European Firm Concentration and Aggregate Productivity

with Filippo di Mauro, Marc Melitz and Matthias Mertens
Journal of the European Economic Association, Volume 21 - Issue 2 , April 2023

References

Javier Miranda (supervisor)
Full Professor
Friedrich Schiller University Jena & Halle Institute for Economic Research
javier.miranda@iwh-halle.de

Marc Melitz
Full Professor
Harvard University, NBER & CEPR
mmelitz@harvard.edu

Reint Gropp
President
Halle Institute for Economic Research
reint.gropp@iwh-halle.de