The Unemployment Puzzle of Corporate Taxation

Using annual data on 19 industrial countries for the period 1979 to 2005 and a large number of controls, this paper is the first to empirically study the impact of corporate taxes on the unemployment rate. In contrast to previous empirical research on the labor demand, investment and growth effects of corporate taxation, which consistently finds adverse effects, our regression results suggest that higher corporate taxes may have a favorable impact, lowering the unemployment rate. The magnitude of the estimated effect is substantial. Our results are robust to both endogeneity and numerous variations in specification.