Passing the burden: corporate tax incidence in open economies

taxes and openness on annual gross wage. All regressions in this paper include random effects,
and the standard errors are clustered at the country level. Dummy variables for low and middle
education levels are included to measure the return to education. The year is entered as a linear
trend; this assumption is made because entering the years as dummy variables would cost many
degrees of freedom in an already small sample. In addition, there are several countries for which
I have only one year of available data. Table 3 estimates that a one percentage point increase in
the corporate tax rate results in a 0.5 - 0.7 percent decrease in gross annual wages. In these
specifications, however, the coefficient on corporate taxes is not statistically significant.
Openness, as measured by total trade divided by GDP, also has a negative impact on wages; a
one percentage point increase in openness results in a 0.23 - 0.48 percent decrease in gross
wages. Openness is statistically significant in both specifications for which it is included.

As expected, there are positive returns to education; the estimates predict that an
individual with a low level of education will earn approximately 70 percent less than an
individual with a high level of education. Individuals with a middle education are estimated to
earn approximately 30 percent less than those with a high level of education. These findings are
statistically significant and remain consistent throughout the results. The individual
characteristics of age, age-squared and male are not statistically significant. This is not surprising
since these variables are measuring the mean value within an education group, and there is little
variation in these measures across skill level. In column III, a ten percentage point increase in the
marginal personal income tax rate is predicted to increase annual gross wages by 7.4 percent.
This positive coefficient may indicate that labor does not bear the full burden of the personal
income tax. However, this result should be interpreted with caution as the marginal personal tax
rate is used to transform net wages into gross wages for approximately half of the observations.

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