Passing the burden: corporate tax incidence in open economies

provided by Research Papers in Economics

Passing the Burden: Corporate Tax Incidence in Open Economies¹

R. Alison Felix*

October 2007

Abstract

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 taxes 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.

Keywords: Tax incidence, Corporate taxation, Tax progressivity

¹ The author would like to thank James R. Hines Jr., Joel Slemrod, Dan Silverman, Clemens Sialm and participants
at University of Michigan’s Public Finance Seminar for invaluable comments and suggestions. All remaining errors
are, of course, my own.

*

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