The Role of Taxes in the Disconnect Between Corporate Performance and Economic Growth

by Urooj Khan, Suresh Nallareddy, and Ethan Rouen

Overview — This paper offers evidence of potential issues with the current United States system of taxation on foreign corporate profits. A reduction in the US tax rate and the move to a territorial tax system from a worldwide system could better align economic growth with growth in corporate profits by encouraging firms to invest domestically and repatriate foreign earnings.

Author Abstract

We investigate the relation between the growth in corporate profits and the overall U.S. economy, focusing on the impact of the U.S. corporate tax regime on this relation. We document that the growth of corporate profits, on average, has outpaced the growth of the economy, and this disconnect increases as the difference between the corporate income tax rate of the U.S. and the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.

Paper Information