DP17455 Short-Term Tax Cuts, Long-Term Stimulus
Using a narrative identification of tax changes in the United States over the period 1950-2019, we document that a temporary cut in corporate income tax rates leads to a long-lasting increase in innovation and productivity. An estimated endogenous productivity model reveals that the long period of tax amortization for the purchases of Intellectual Property Products (IPP) featured in the US tax code over most of the sample is crucial to account for this finding. We provide direct evidence on the model mechanism by showing that a temporary corporate tax cut generates a more pronounced jump in the share prices of patent-rich firms, leading to a persistent increase in R&D expenditure, non-R&D IPP investment, patents and trademark assignments.
