DP17455 Short-Term Tax Cuts, Long-Term Stimulus
We study the persistent effects of temporary changes in U.S. federal corporate and personal income tax rates using a narrative identification approach. A corporate income tax cut leads to a sustained increase in GDP and productivity, with peak effects between five and eight years. R&D spending and capital investment display hump-shaped responses while hours worked and employment are much less affected. In contrast, personal income tax cuts trigger a short-lived boost to GDP, productivity and hours worked but have no long-term effects. We develop and estimate an endogenous growth model with variable factor utilization and show that these features generate a pro-cyclical response of productivity which is key to account for our empirical findings.