Passing the burden: corporate tax incidence in open economies

Hassett and Mathur (2006) have recently estimated the effect of corporate taxes on gross
wage rates in manufacturing industries. They find that a one percent increase in the corporate tax
rate results in a 0.84 to 1.19 percent decrease in wage rates. As a robustness check of my results,
I use my data to run the specifications used in Hassett and Mathur (2006). These results are
presented in Table 4. Looking at column II, a one percent increase in the corporate tax rate is
shown to decrease hourly wage rates by 0.43 percent.¹² The 95 percent confidence interval of
this result falls entirely below the findings of Hassett and Mathur. In addition, my sample
includes only OECD countries in which Hassett and Mathur find wages to be more correlated
with corporate tax rates. My estimate of 0.43, therefore, should represent the upper-bound of
their specification. This specification includes value added per worker in manufacturing. In a
perfectly competitive model, we expect the marginal value added per worker to be equal to the
wage rate. So, as expected, the correlation between wage rates and value added per worker is
high. The predicted impact of the corporate tax rate on wages comes via a decrease in the
marginal productivity of labor; thus, including value added per worker as an explanatory variable
seems to give a coefficient on the corporate tax rate that is difficult to interpret.

4.2 The Interaction of Tax and Openness

As shown in Section 2, theory predicts that openness should have a large, negative impact
on labor’s burden from corporate taxation. Table 5 displays the empirical estimates with the
added interaction between openness and the corporate tax rate.¹³ Including this interaction term
generates several interesting results.¹⁴ First, the effect of the corporate tax rate on annual gross
wages is similar to the results found in Table 3. However, the coefficients are now larger in

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