Research
Did the decline in corporate taxation contribute to the declining manufacturing share observed in all the advanced countries? This article provides causal evidence that the answer is yes, and, tax cut explains from 20% to 30% of the observed decline in manufacturing. I combine longitudinal administrative firm-level data of Germany with 8,000 local tax changes for identification. Using Difference-in- difference estimations, I show that local tax hikes increase the local manufacturing share. Firm-level results reveal this is due to wage, employment, firm entry, and labor productivity in the service sector being more responsive to a tax shock than 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.