Corporate Tax Cuts and the Decline of the Manufacturing Labor Share
(UNIVERSITY OF MONTREAL)
OCTOBER 22, 2020
Abstract: We document a strong empirical connection between corporate taxation and the manufacturing labor share, both in the US and across OECD countries. Our estimates associate 30% to 60% of the observed decline in labor shares with the global fall in corporate taxation. Using an equilibrium model of an industry where firms differ in their capital intensities, we show that lower corporate tax rates reduce the labor share by raising the market share of capital intensive firms. The tax elasticity of the labor share depends on the joint distribution of labor intensities and value added at the micro level. Given the empirical distribution in the US manufacturing sector, the model predicts that corporate tax cuts can explain about half of the decline in the manufacturing labor share since the 1950s. The shift away from traditionally large, labor intensive production units raises the concentration of market shares and reduces the concentration of employment. We find support for these predictions by studying the evolution of sales and employment concentration in US manufacturing industries.