By Patrick Kennedy

In a sweeping one-time test of corporate tax policy, UCLA economist Patrick Kennedy (with collaborators at the Joint Committee on Taxation) analyzes the effects of the 2017 Tax Cuts and Jobs Act (TCJA), the largest federal corporate income tax cut in U.S. history. Leveraging a natural experiment due to idiosyncrasies in U.S. tax law, the study compares outcomes of corporations that received larger versus smaller tax cuts, providing clean before‑and‑after comparisons across otherwise similar firms.

Sharper incentives, faster growth

The researchers identify a substantial tax cut of 5–6% for C‑corporations relative to S‑corporations, fueled by the TCJA’s reduction in corporate tax liability. This translated into a 4.4 percentage‑point uptick in their capital stock, pointing to meaningful firm expansion. Pre‑tax profits rose by about 2.2 percentage points, signaling that the value of the additional goods and services provided by these firms exceeded the costs required to produce them.

Shareholder payouts soar

Shareholders reaped especially large benefits. After‑tax profits of C‑corps rose by 9.2%, while payouts to shareholders through dividends and buybacks jumped by 18.2%. These results confirm that much of the immediate tax windfall was distributed directly to firms’ shareholders, rather than plowed back into new equity issuance or borrowing.

More jobs and higher pay at the top

Workers also shared in the gains, but unevenly. Employment at C-corps increased by 1.3%, reallocating workers from other jobs into the corporate sector. Average earnings at C‑corps increased modestly, by 0.6%. The median worker saw no detectable change in earnings, but pay at the 95th percentile rose 1.1%, and executive compensation climbed 2.3%. These results suggest that corporate tax cuts disproportionately boosted high-income earners within firms, with little short-run effect on typical workers’ wages.

Bringing it all together: Growth and Fairness

Aggregating across the economy, the study estimates that 73% of the total income gains from the tax cuts accrued to the top 10% of households. Moreover, income gains were nearly twice as large in high-income urban centers like New York and San Francisco than in the median American county. The evidence thus highlights a central trade-off: corporate tax cuts reduce distortions, increase firm activity, and raise economic growth across the American economy, but also deliver disproportionately large benefits to high earners. For policymakers, the findings underscore that while tax cuts can spur measurable economic growth, their consequences are uneven for American households across the country.

The study, “Corporate Tax Cuts, Firm Growth, and Workers’ Earnings,” is available here.

Maurizio Mazzocco

By Maurizio Mazzocco

The abuse of entrusted power by politicians through rent-seeking and corruption is a serious concern in much of the developing world. There have been countless examples both across countries and over time of political elites diverting funds intended for basic public services such as in education, health, and infrastructure. Notable cases include former President Mobutu Sese Seko of Zaire, who reportedly embezzled around $5 billion before being removed from power in 1997, and Ferdinand Marcos, the former president of the Philippines, who allegedly stole over $35 billion. Not surprisingly, corruption is widely considered to be a major obstacle for economic and social development, and several studies have documented a strong negative relationship between corruption and various measures of economic development such as investment and growth. Therefore, designing effective policies to reduce political corruption is of first-order importance.

In their paper, “Combating Political Corruption with Policy Bundles,” UCLA Professor Maurizio Mazzocco and coauthor Frederico Finan (Berkeley) employ an objective corruption measure derived from audit reports to evaluate four popular anti-corruption policy interventions: increasing audit probabilities, prohibiting convicted politicians from seeking public office again, extending term limits, and raising politicians’ salaries.

The authors find that policies that strengthen the power of reelection incentives, such as extending term limits or banning corrupt politicians from running for office, can substantially reduce corruption among politicians who are eligible for reelection. But for politicians with shorter time horizons, such as those who have been term-limited, these policies are much less effective. In contrast, an audit policy can reduce corruption among both groups of politicians because it both promotes electoral accountability and brings about legal punishments. But audits are also costly and, as a result, are not necessarily the best option.

Leveraging these insights, the authors then evaluate the efficacy of combinations of individual policies. Their main finding reveals that policy bundles substantially outperform individual policy at a fraction of the cost. For instance, a policy that bans convicted politicians from running for public office combined with a term limit policy and an audit policy with relatively low audit probabilities, can reduce corruption by approximately 60% more than the best-performing individual policy at reduced costs. As a result, individuals are willing to pay 1.3% of their annual income for such a multi-pronged approach, significantly exceeding their willingness to pay for standalone policies by over 30%.

This study’s core insight is broadly applicable beyond corruption, including critical sectors such as healthcare and education. By strategically combining policies to leverage their respective strengths and mitigate their limitations, policymakers can construct policy bundles that are substantially more effective and cost-efficient than individual interventions.

The paper can be found here http://www.econ.ucla.edu/mazzocco/doc/Corruption.pdf.