Goods producers increase their capital expenditure and employment in response to a cut in marginal corporate income tax rates or an increase in investment tax credits.
In contrast, companies in the service sector mostly use any tax windfall to increase dividend payouts. The authors of the Who Gains From Corporate Tax Cuts? (National Bureau of Economic Research working paper, May 2023) base their conclusions on a novel measure of US firm-specific tax shocks that combines changes in statutory tax rates faced by each firm with narrative identified legislated US federal tax changes between 1950 and 2006.
London Business School’s Paolo Surico, the University of California Davis’s James Cloyne, Bentley University’s Ezgi Kurt found that if manufacturers get a better tax deal, one can expect a boost in the number of people employed in that industry.
However, that is not all companies. Those that do not produce goods respond differently to a drop in the corporate tax rate.
"Companies in the service sector mostly use any tax windfall to increase dividend pay-outs," the report states. The detail provided is telling, as outlined by the authors:
"Following a 1% cut in marginal tax rates, service sector firms increase dividend pay-outs significantly and by up to 5%," the report states. "But do not adjust wage bills at all."