Will A Decline in The Corporate Income Tax Rate Generate Jobs?
The corporate income tax rate in the U.S. is almost forty percent. This high tax rate has been associated with depressing employment growth. Cutting or even eliminating corporate income tax has been proposed during the recent presidential campaigns based on the idea that a lower tax rate can provide incentives for corporations to increase job opportunities. To understand the link between corporate income tax and employment growth, we use a dynamic general equilibrium occupational choice model where agents have heterogeneous entrepreneurial abilities. Two features in the model are important in driving the results. First, agents in the model can choose to enter and exit the market depending on their heterogeneous entrepreneurial abilities. This allows us to explore the impact of extensive margin on employment. Second, we incorporate dynamics into a general equilibrium model. This feature allows us to study how firm dynamics affect wage rate and employment opportunities in a general equilibrium framework. Given these two features, a change in corporate income tax rate presents interesting offsetting effects on employment growth. On the one hand, a lower corporate income tax encourages entrepreneurship, and an increase in the number of firms would likely create additional labor demand. This force would increase equilibrium wage and employment level. On the other hand, more agents becoming firm owners would reduce the pool of workers. As a result of a leftward shift in supply, equilibrium wage would rise and employment level would decrease. The overall effect on employment remains ambiguous. To quantify the effect, we calibrate our model to the U.S. economy and perform tax policy experiments under the calibrated parameterization. We find cutting corporate tax rate by half decreases employment hours by 1.1%, while eliminating the tax can decrease employment hours by 2.8%. Our preliminary result contradicts the statement that a cut in corporate income tax can generate jobs.
