Description:
Abstract. U.S. corporate tax cuts have become less expansionary since the mid-1980s. Using general equilibrium models with corporate financial allocations, we show that rising share buybacks render corporate tax cuts less expansionary. Although buybacks increase shareholders’ and non-shareholders’ welfare, they dampen the investment and output responses to corporate tax cuts. Simulations based on the Tax Cuts and Jobs Act show that the optimal buyback increase is much smaller than what is observed. This suggests that restricting on buybacks would enhance the macroeconomic effects of the corporate tax cut