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Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment

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.

Owen Zidar, Chicago Booth and NBER
Publication Date: 
February, 2017
Publication Status: 
Document Number: 
No. 2017-04
File Description: 
February 2017 version