Passing the burden: Corporate tax incidence in open economies

 

R. Alison Felix

 

Federal Reserve Bank of Kansas City RRWP 07-01 (2007)

 

High rates of corporate taxation reduce corporate investment and thereby depress local wages. Using cross-country data I estimate that a ten percentage point increase in the corporate tax rate of high-income countries reduces mean annual gross wages by seven percent. The results do not support the common belief that the burden of corporate tax falls most heavily on skilled labor; corporate taxation appears to reduce the wages of low-skill and high-skill workers to the same degree. The incidence of the corporate tax in the form of reduced wages suggests that taxing labor instead of taxing corporations could be Pareto-improving.