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04112017-WP-effects-of-income-tax-changes-on-economic-activity

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Author:

Owen Zidar, Assistant Professor of Economics, University of Chicago Booth School of Business & Faculty Research Fellow, National Bureau of Economic Research

Abstract:

This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM. I aggregate each tax change by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups, and that the effect of tax cuts for the top 10% on employment growth is small.