The Role of Regulation and Taxes in US Capital and Labor Input Use

This paper uses revised and extended data on federal regulation and marginal tax rates to provide a closer look than previous studies at how these policy variables affect the mix of inputs used in the US economy. Time-series models for labor and physical capital inputs indicate that regulation and taxes alter the time paths of both inputs, with a positive tax effect dominating the movement of labor and a negative regulation effect dominating for capital. In terms of the mix of inputs used in production, the combined effects of changes in tax rates and regulation since 1949 reduced the level of capital per worker by more than 50 percent through 2016.