Economic Article Review: "The U.S. Corporate Tax Reform and Its Macroeconomic Outcomes"

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Economics is primarily concerned with the analysis of production, distribution, and the consumption of goods and services. The social science is typically broken down into two branches of how economies work: microeconomics, which examines the basic elements of an economy, including markets and their interactions and macroeconomics, which is a focus on the economy as a whole and the varying issues that affect it such as unemployment, inflation and overall fiscal policy. Economic analysis can be applied to a variety of subjects including business, finance, healthcare, and the government.

Nahid Kalbasi Anaraki's article, "The U.S. Corporate Tax Reform and Its Macroeconomic Outcomes," discusses the corporate tax reform as being a central issue in many U.S. presidential debates the adverse affects associated with it. Anaraki attempts to measure the adverse effects of the corporate tax rate using macroeconomic variables such as investment, real GDP, productivity growth, hourly wages, the unemployment rate, consumer price index and the natural rate of unemployment. Anaraki analyzes each within as far as definition then implements a study on these factors.

Much has been said about the undesirable effects of a tax hike on the variables, but few studies have been attempted to measure these effects. The article seeks to investigate the quantitative outcomes of a corporate tax hike on macroeconomic variables such as private investment, real GDP, productivity growth, hourly wages, short and natural rate of unemployment as well as consumer price index (Anaraki, 2013). Anaraki discusses the business cycle in conjunction with the traditional orthodox Keynesian model in order to assess each of these effects. Three specific economic principles dominate the majority of Anaraki’s article, which are elasticity of demand, GDP and the business cycle as it relates to the corporate tax hike that is being examined.

Introduction Assessment

In most economic situations, there is a judgment of the business cycle which is defined as being the fluctuating economic activity. A business cycle can be asymmetrical and largely unpredictable. It is typically measured by the production of goods and services or the number of people who are employed at a given time in relation to certain fiscal policies. These policies are heavily influenced by a change in demand, which in turn influences a permutation of inflation and unemployment in the short-term (Mankiw, 2012). For Anaraki, the traditional business cycle is assessed within the confines of the orthodox Keynesian model, which states that a "tax performs as an automatic stabilizer because it reduces the effective demand during a boom and raises it during a recession - which is becoming a worldwide phenomenon. The automatic stabilizer feature of a tax rate is only functional under price and wage rigidity assumption. The price and wage rigidity assumption does not apply to all circumstances" (Anaraki, 2013). n

As a result of the automatic stabilizer feature, Anaraki suggests that newer Keynesian models do not need this because of the fact that newer Keynesians examine menu costs, which are the costs for changing the prices and informing the general public of this change and because of the fluctuations that take place within a business cycle produce too much price adjustment. Thus, New Keynesian theory does not tend to apply an automatic stabilizer as the older theories do (Anaraki, 2013). To understand this better, Anaraki opted to assess the aforementioned macroeconomic effects to better understand and measure the effects on one standard deviation in the corporate tax rate. The introduction is thorough and concise so the reader understands where Anaraki is heading in the deliberation on whether a hike in the corporate tax rate will affect the mentioned variables.

Literature Review

Anaraki employs a literature review, which is the standard bearer for most, if not all economic articles. He asks many of the same economic questions we all have. The reader needs to understand the background that is associated with what the article seeks to prove. Anaraki assesses Caroll and Prante (2012), which investigated the long-run effects of an increase in tax rate on high income taxpayers in 2013. Using a general equilibrium model for the economy of the United States, Caroll and Prante (2012) analyzed the effects of a tax rate increase in the long run as it relates to the entire country and the policies associated with it. Caroll and Prante (2012) found that "higher tax rates [would] have significant adverse effects on output, employment, investment, capital stock and real wages" (Anaraki, 2013) and in turn would alter the percentages associated with employment, investment and real wages after taxes for the American people.

In the literature review, Anaraki also examined Galindo and Pombo (2011) and Djankov (2010) to gain a better understanding of the impact of corporate taxation on investment and productivity and the effects of the corporate tax rate on investments. For Galindo and Pombo (2011), these individuals used a data set of 42 developing countries and factored into the equation different firm sizes and how each were specifically affected by different taxation. They used variables such as GDP per capita as well as corporate tax rate. Djankov (2010) assesses 22 rich OECD countries to determine how investment affects the percentage of GDP. The researchers also sought to scrutinize measures of free enterprise in order to understand a variety of variables including tax evasion, property rights and government directive. Anaraki also assessed other articles including Gummins and Hassett (1992) which focused on the effects of taxation on investment using a vector auto-regression model and compared it to pre-tax reform levels between 1970-1989; Engen and Skinner (1996) who compared changes in the tax policies between certain dates and their effects on the elasticity of demand. Elasticity of demand is considered to be the measure of the receptiveness of amount demanded to a change in one of the determinants. There are numerous determinants that characteristically can sway elasticity of demand such as accessibility of close substitutes, necessities versus luxuries, designation of the market, and time horizon. For Engen and Skinner (1996), they employ the time horizon and approach it to different microeconomic variables to better understand how the real GDP growth rate was averaged between 1964 and 1969 as well as 1983 and 1989 (Anaraki, 2013; Mankiw, 2012).  Following the literature review, Anaraki (2013) describes the theoretical approach that will be used to examine the effects of a corporate tax hike on the macroecomic variables.

Theoretical Model

In this section, Anaraki presents the Keynesian investment model and employs it as a function of real GDP. Presented in several tables at the conclusion of the article, Anaraki notes that "a tax hike raises the cost of capital and therefore, reduces investment. The corporate tax rate has also been embedded into [what Anaraki notes as being] a Solow growth model because it raises the cost of capital and reduces investment, which in turn affects real GDP" (Anaraki, 2013). Gross domestic product is typically described as the total value of goods produced and services provided in a country during a particular year (Mankiw, 2012). Through a series of equations, Anaraki is also about to determine the consumer price index and how it will be affected as well based on the corporate tax rate. "Consumer price index (CPI) is estimated as a function of money supply and corporate tax rate because a tax hike affects after tax profits and therefore, indirectly affects the price setting decision of entrepreneurs" (Anaraki, 2013). The essential role of this section is to definitively explain how each of the theories factored into what is being investigated. 

Data and Regression Results Analysis

In the data analysis, Anaraki "uses quarterly data from the first quarter of 1960 through the fourth quarter of 2010 to estimate the effects of a corporate tax rate hike on private investment, real GDP, productivity, hourly wage index, unemployment rate, natural rate of unemployment, and CPI" (Anaraki, 2013) to try and examine statistically the adverse effects on the macroeconomic variables. Anaraki uses a logarithm to determine that the results indicate "that a 10 percentage point increase in effective corporate tax rate reduces private investment by 3.1%, real GDP by 1.5%, productivity by 2.6% and hourly wages by 4%. The effects on short-run and natural rate of employment were positive, as [Anaraki] expected" (Anaraki, 2013). Anaraki also uses an investment model to suggest a relative percentage increase in the corporate tax rate and how that percentage will affect the macroeconomic variables.

Anaraki estimates that "not only will investors try to reduce the wage costs due to lower profits but also they will lay off some workers to compensate for a tax hike. This [Anaraki] describes is the demand side effect, which affects wages, productivity, and unemployment rate” (Anaraki, 2013). Here Anaraki uses the idea of demand curves to draw inferences about the corporate tax rate increase. "Economists classify demand curves according to their elasticity. Demand is considered elastic when the quantity moves proportionately more than the price. Demand is considered inelastic when the quantity moves proportionately less than the price. The price of elasticity of demand measures how much quantity [is] being demanded in response to a change in price" (Mankiw, 2012). Anaraki reasons that the elasticity of demand will be elastic based on a hike in the corporate tax rate. 

 On the supply side, a higher corporate tax rate reduces hourly wages; workers have to work longer hours to retain their purchasing power, shifting the labor supply to the right and creating higher unemployment rate in the short-and long-run" (Anaraki, 2013). In other words, Anaraki supposes that the estimated results here will be that a corporate tax hike will affect both the supply and demand side of things as it relates to the macroeconomic variables presented. In the assessment of the CPI and how it will be affected, Anaraki states that there will be a rise by roughly 0.9% as a result of the shortage of supply of goods and services per the increase in the corporate tax rate. 

Conclusion Analysis

Anaraki is able to make a decisive conclusion based on the theoretical models used that the results were close to Caroll and Prante (2013) in relation to the estimated fall of output by about 1.5% and that the results regarding the increase in the corporate tax rate were close to what Djankov (2010) found in their study on private investment. "The estimated results of this study indicate a reduction of 3.1% in private investment; the difference in the magnitude of the fall in private investment in this study and that of Djankov (2010) may be due to different samples [of countries]" notes Anaraki (Anaraki, 2013). Anaraki refutes what was found in Engen and Skinner (1996) based on what was discovered in this study noting that productivity and labor force participation are only mildly responsive to tax policy reform. 

Anaraki writes, “contrary to Eric Engen and Jonathan Skinner (1996) who found that labor force participation and productivity are only mildly responsive to tax policy reform, the estimated results here indicate that a 10 percentage point increase in corporate tax rate reduces productivity by 2.6%. Indeed, there is a possibility that the drop in the productivity growth during the past few years may be attributed to higher corporate tax rate because with a higher corporate tax rate investors will have less profits and pay lower wages, which in turn adversely affects productivity growth" (Anaraki, 2013). Engen and Skinner (1996) noted that there was a significant response in these variables when tax policy is reformed, however, Anaraki believes otherwise based on the results of the study. Anaraki reasons at the conclusion of the study that since corporate tax rate affects the qualified price of labor to capital, it can also in turn influences the pronouncement of labor supply and therefore its option to work. This is stated to alter the wage index significantly. The predictable results here designate that hourly wage index is very elastic to changes in the corporate tax rate (Anaraki, 2013). The basis of what Anaraki found were that a corporate tax hike would have a distinctive affect on the macroeconomic variables that were measured.

Table Analysis

The first table outlines a list of variables and their summary statistics that Anaraki used in his study. The variables are GDP, real GDP growth, private investment, investment ratio to GDP, government expenditures ratio to GDP, effective corporate tax rate, effective federal fund rate, consumer price index, inflation rate of CPI, real interest rate, money supply, oil price, employment, stock of gross capital, civilian labor participation rate, hourly wage in dollars, productivity index, employment rate, unemployment, unemployment duration, natural rate of unemployment, ratio of imports plus exports to GDP, tertiary ratio and business cycle. For each of these Anaraki (2013) delineates a mean, maximum, minimum and standard deviation of the data that were derived from the Federal Reserve Bank of St. Louis, the IRS and World Bank Data Base. It appears from this table that the variables most affected by a corporate tax hike are GDP and the private investment.

In table 2, notes the estimated effects of effective corporate tax rates on macroeconomic variables. Anaraki (2013) outlines the independent variables and lists the various values that were purported to be dramatically affected by the corporate tax rate hike. The table shows that the corporate tax rate is reasoned affect all of the dependent variables: investment, GDP, productivity, wage, unemployment, CPI and NROU. Anaraki (2013) also reasons in this table that GDP will be affected by private investment and that labor will then in turn be affected by GDP.


It can be noted that Anaraki (2013) was perhaps the most conclusive study on the corporate tax rate and its effects on many macroeconomic variables. Anaraki scrutinized heavily several theoretical models in order to better understand the results that were attributed from his study. It would appear that prior research yielded similar results as to how a corporate tax rate hike would affect both supply and demand, as well as a myriad of factors such as unemployment and labor participation. It stands to reason then that corporate tax rates do affect the world we live in, whether there is an increase or decrease. While the effects are different depending upon what statistical data and theoretical model is used, there will inevitably be an effect. This premise carries across many countries but primarily the United States, given Anaraki (2013)'s delineations about the varying countries in which this argument was purported. Future studies on the corporate tax rate hike should acquiesce comparable results given Anaraki (2013) found that the results in the study were similar to previously performed ones.


Anaraki, N. K. (2013). The U.S. corporate tax reform and its macroeconomic outcomes. Research in World Economy, 4(1), 14-21.

Makiw, N. G. (2012). Principles of macroeconomics (6th ed.). South-Western College Publishing.