Short-Term Tax Cuts, Long-Term Stimulus

Short-Term Tax Cuts, Long-Term Stimulus is a study recently undertaken by London Business School’s professors Paolo Surico and Joseba Martinez, together with Queen Mary University of London’s Haroon Mumtaz and University of California, Davis’ James Cloyne.

Professor Martinez gave a presentation of the paper in mid-July of this year at the National Bureau of Economic Research Summer Institute.

The paper finds that 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. Interpreting their results through the lens of a macroeconomic model, the authors find that corporate income tax cuts work by stimulating R&D and technological adoption, leading to persistent effects on productivity and GDP.

Short-Term Tax Cuts, Long-Term Stimulus can be downloaded here.