Corporate Taxes, Productivity, and Business Dynamism

We estimate the effects of corporate income tax shocks using aggregate data and variations in state corporate tax rates. Our main findings are that, in response to a corporate tax cut: (i) labor productivity increases; (ii) entry increases with delay; (iii) exit increases; (iv) total labor increases by more than production labor. To rationalize these empirical findings, we build a New Keynesian model with idiosyncratic firm productivity, and firm entry and exit. Our model features productivity gains due to selection along both the entry and exit margins in response to the shock. Models with homogeneous firms do not feature selection, and, for this reason, deliver counterfactual dynamics