Principal investigator: Omar Barroso Khodr
Authors: Juan Carlos Suárez Serrato and Owen Zidar
Original title: Who Benefits from State Corporate Tax Cuts? A Local Labor Market Approach with Heterogeneous Firms
Location of the Intervention: United States (USA)
Primary Variable of Interest: Local economic outcomes, including population (N), wages (w), rental prices (r), and number of commercial establishments (E), allow researchers to track the impact of tax changes on workers, landowners, and business owners.
Type of Intervention: Changes in state corporate tax rates and allocation rules act as cost shocks for local businesses.
Methodology: The methodology combines structural economic modeling with reduced-form empirical estimation, using a system of simultaneous equations that captures the supply and demand for labor.
Summary
In Suárez Serrato and Zidar (2016), the authors estimated the incidence of state corporate taxes. Malgouyres, Mayer, and Mazet-Sonilhac (2023) identify two problems: the omission of effects on firm composition and the inconsistent characterization of capital costs. This response corrects the structural model and the corresponding incidence estimates. The revised results remain close to those originally reported, although some confidence intervals widen. In the corrected structural model, the share of owners in the tax incidence differs by 1,6 percentage points from the original version (38,1% versus 36,5%). The share of workers is estimated at 35,0%, while landowners absorb the remaining 26,8%.
- Policy Problem
The main political question addressed by Serrato and Zidar (2023) is determining the true economic impact of state corporate tax cuts—that is, who actually bears the burden or benefits from these tax changes. This is a central issue for state fiscal policy, as it defines whether such cuts stimulate the local economy or function primarily as windfall gains for business owners. The original study (SZ, 2016) sought to quantify how much of the tax benefits are passed on to workers via wages, to landowners via property appreciation, and how much remains with business owners in the form of higher profits. This distributive impact is essential for the design of equitable and efficient tax codes.
The authors' commentary raises important methodological questions about the accuracy of the models used to estimate this incidence. It identifies two problems. The first is the "compositional margin": tax cuts may not only increase the profitability of existing firms but also attract less productive firms, altering the average composition and potentially distorting interpretations based on aggregate data. The second is an inconsistency in the treatment of the cost of capital across locations, a crucial element for business location decisions.
SZ's (2016) response addresses the robustness of these estimates. The authors acknowledge the conceptual validity of the proposed corrections, but show that a simple calibration—while theoretically correct—is highly sensitive to the data and controls used, producing unstable results. This reveals a broader challenge in public policy research: the need for more robust empirical strategies. To advance this, SZ introduces new identification strategies in a complementary article, exploring different economic moments, such as effects on labor demand and local productivity, to estimate incidence with greater reliability.
Thus, the debate evolves from the question “who benefits?” to “how to measure this accurately and consistently to guide sound tax policies?”. Even after incorporating the corrections, the results continue to indicate that business owners capture a significant share of the benefits from state corporate tax cuts.
- Policy Implementation Context
Serrato and Zidar offer a framework for evaluating the implementation of state and local tax incentives used to attract investment. Governments frequently reduce corporate taxes or grant exemptions with the aim of stimulating economic development. The research examines whether these policies actually work—and for whom. By measuring the impact on workers, landowners, and business owners, the study allows us to assess whether such incentives improve local well-being or ultimately benefit business owners and shareholders.
The methodological discussion highlights a central challenge: the need for robust evaluations. The “compositional margin” shows that aggregate wage changes can be misleading, as the entry of less productive firms can distort averages, even when existing workers benefit. This reinforces the importance of monitoring not only the number of jobs, but also their quality and the composition of firms.
Taken together, the findings indicate that the effective implementation of tax incentives requires detailed metrics and continuous monitoring to identify their real impact on the local economy and its beneficiaries.
- Method
Serrato and Zidar develop a structural economic model to analyze how changes in state corporate taxes affect local economies. The model describes the behavior of workers, businesses, and landowners in different localities, recognizing that each group reacts to tax changes in a way that determines the final tax incidence. The framework incorporates both workers' location decisions—influenced by wages, housing costs, and personal taxes—and businesses' location decisions—guided by profits, taxes, and local costs.
According to the authors, a key advance in the revised version is the explicit modeling of the "compositional margin": tax cuts can attract new firms, many of them less productive, altering average local productivity and, consequently, wages and other economic outcomes. The model captures this mechanism by linking average productivity to the number of firms in the locality, a relationship determined by the dispersion of productivity among firms.
The methodological core of the study is a system of four simultaneous equations. The first describes the labor supply, relating population to wages, housing costs, and personal taxes. The second decomposes labor demand into three margins: number of firms, employment per firm, and average productivity. The third models the housing market, determining how rents respond to population and productivity changes. The fourth describes the location of firms, showing how the number of establishments reacts to wages, corporate taxes, and local productivity.
To estimate the system, the authors project unobserved productivity shocks onto observable Bartik shocks, creating three sources of variation: corporate taxes, personal taxes, and Bartik shocks. The system solution generates reduced forms that show how each shock affects population, wages, rents, and the number of firms.
Finally, the identification explores the fact that these shocks propagate in distinct ways. Corporate tax cuts act as labor demand shocks, allowing the identification of parameters linked to worker preferences and the housing market. Personal tax cuts, on the other hand, function as labor supply shocks, identifying parameters related to company technology. By simultaneously observing the effects on all four outcomes, the model recovers the structural parameters without requiring direct data on productivity or preferences.
- Main results
The main conclusion is that incorporating the two proposed methodological corrections has only a minimal quantitative impact on the original incidence estimates of SZ (2016). The share of business owners in the incidence of a cut in the state corporate tax changes by only 1,6 percentage points, from 36,5% to 38,1%. The shares of workers and landowners remain similarly stable at approximately 35,0% and 26,8%, respectively. This demonstrates that the central conclusion of the original study is robust to these important theoretical refinements.
The authors acknowledge that the confidence intervals around these incidence shares remain wide, indicating statistical imprecision. This imprecision motivated the development of new empirical strategies in their complementary article (Serrato and Zidar 2023a). By incorporating additional data and innovative approaches that focus on the reduced effects on labor demand from established firms and local productivity, the authors are able to estimate the share of business owners with greater precision, obtaining estimates between 52,3% and 61,9%.
Finally, the main conclusion that emerges from both the corrected structural model and the new empirical strategies is that business owners bear a substantial share of the impact of state business tax cuts. This finding holds true across various methodological approaches and confirms SZ's original insight: state business tax cuts are not fully passed on to workers and landowners, but instead provide significant benefits to business owners and shareholders. This has important implications for policymakers who consider tax incentives as a tool for local economic development.
- Lessons in Public Policy
This study offers three essential lessons for state and local governments. First, corporate tax cuts do not work as direct stimulus for workers and residents. Since business owners capture about 40% or more of the benefits, expectations that tax incentives will translate primarily into higher wages or increased local employment need to be moderated. A significant portion of the tax waiver ends up benefiting shareholders who often do not even reside in the jurisdiction.
Secondly, research shows that evaluating policies solely based on the number of new businesses or aggregate job growth can be misleading. Since cuts tend to attract lower-productivity firms—the “compositional margin”—it is crucial to also consider the quality of the businesses and jobs created, not just their quantity.
Finally, the study highlights the need for robust analytical methods. The wide confidence intervals and sensitivity of the estimates reveal the difficulty of accurately measuring tax incidence. Thus, decisions on corporate tax policy should be made cautiously and based on multiple sources of evidence, which requires greater capacity for data collection and evaluation to verify whether incentives truly meet their objectives.
References
Malgouyres, Clément, Thierry Mayer, and Clément Mazet-Sonilhac. 2023. “Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms: Comment.” American Economic Review 113 (8): 2270–86.
Suárez Serrato, Juan Carlos, and Owen Zidar. 2016. “Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms.” American Economic Review 106 (9): 2582–2624. Suárez Serrato, Juan Carlos, and Owen M. Zidar. 2023a. “Who Benefits from State Corporate Tax Cuts? A Local Labor Market Approach with Heterogeneous Firms: Further Results.” NBER Working Paper 31206.
