Thought of the Week - Corporate taxes don’t matter

President Biden has proposed several wide-ranging government spending programmes, all of which he aims to finance with higher taxes on corporations and the wealthy. It’s of course far from certain that these spending programmes and tax hikes will become reality given his slim majority in Congress but the outcry by businesses and investors about the detrimental effects of higher corporate taxes could be heard across the pond, even without the use of modern electronic communication.

Joachim Thought Of The Week

Low taxes are good for the economy has become the mantra of conservatives for forty years now, despite the fact that for forty years we now have mounting evidence against it. Trickle down economics, the theory that if you lower taxes for the wealthy they will create jobs and faster growing economy, is one of the most widely discredited theories in the history of 20th century economics.

And on the corporate side, the Republican tax cuts of 2018 were supposed to spur economic growth and induce companies to repatriate cash they held in tax havens overseas. The strong performance of US stock markets in 2018 is commonly used as an example that corporate tax cuts work. The problem just is that this is an anecdote and not one that is representative of the data.

Corporate Tax Chart

I have gone back to 1909 and looked at the relationship between corporate tax rate changes in the United States and stock market returns. For every time the tax rate changed, I started 6 months before the new tax rate was enacted to capture any moves due to the announcement of new taxes and stopped 18 months after the changes were implemented to capture the actual impact of the changed rates on businesses.

The correlation between corporate tax rate changes and stock market returns was -0.1, or essentially zero. There is no link between changes in corporate tax rates and stock market returns. I then restricted my analysis to the time from 1970 onwards to capture the miserable 1970 and the tax cuts of the Reagan years and the correlation was still -0.1.

The lesson from all the analyses I know about corporate taxes and stock market returns I know is: There are far more important factors like growth, inflation, and interest rates that determine stock market outcomes. Corporate taxes hardly matter at all.

This is not to say that if corporate taxes are too high they will stifle business. Once corporate tax rates go above 50% I would argue that this is clearly too high. But on the other hand, we also have to realise that corporate tax rates can be too low. There is a point where corporate tax rates are so low that they no longer provide a stimulus to businesses if they are lowered any further.

And as for the promises of the 2018 tax cut to create higher investments in the United States and the repatriation of foreign cash holdings? A study by the IMF found that corporate investments indeed rose substantially after the tax cuts but that this was not due to the tax cuts but due to the strong economy at the time. These investments would have happened anyway, with our without the cuts. And the money parked abroad that was supposed to be repatriated and create jobs in the United States? Another study found that not only did that money never come back home but that companies with lots of cash abroad instead accelerated their foreign investments and preferred to invest outside the US.


Thought of the Week features investment-related and economics-related musings that don’t necessarily have anything to do with current markets. They are designed to take a step back and think about the world a little bit differently. Feel free to share these thoughts with your colleagues whenever you find them interesting. If you have colleagues who would like to receive this publication please ask them to send an email to This publication is free for everyone.

New York


Ropemaker Place, Level 12 25 Ropemaker Street London EC2Y 9LY

New York

20th Floor 575 Fifth Avenue New York NY 10017