Tax Cuts and the Rise in Intangibles

Abstract

We document a strong empirical connection between corporate income taxation and the share of intangible capital in the U.S. and a set of other developed countries. Our estimates associate around 25% of the observed increase in the share of intangible capital with the fall in corporate income taxation. We show that intangible-intensive firms use less debt, incur lower interest expenses, and face higher effective corporate income tax rates, leaving a larger share of their capital income exposed to corporate taxation. Exploiting the 2017 U.S. federal corporate tax cut, we provide causal evidence that a cut in the corporate income tax rate leads to a larger expansion of intangible-intensive firms. Using a multi-sector general-equilibrium model calibrated to the U.S. economy, we show that lower corporate tax rates reduce the user cost of intangible capital relative to tangible capital and thereby increase the aggregate share of intangible capital. Joint paper with Luigi Iovino and Julien Sauvagnat.