magnitude, statistically significant and predict that a one percentage point increase in the
corporate tax rate will result in a 0.7 - 1.2 percent decrease in annual gross wages.
GDP per capita is included in column I in order to control for country level omitted
variables that may impact gross wages. When GDP per capita is excluded from the specification
as in column III the majority of the explanatory power of the regression is gone. In addition, the
absolute value of the coefficient on the marginal corporate tax rate is larger when GDP per capita
is not included in the regression. Thus, there must be a negative correlation between the marginal
corporate tax rate and GDP per capita.
Perhaps the most interesting result is the significant, positive coefficient on the
interaction of openness and corporate tax rates. Theory predicts that this coefficient should be
negative. There are several explanations, however, that may explain the positive coefficient.
First, all of the countries in my data are considered to be open economies by the Sachs-Warner
openness index in the years used.15 It is likely that having an open economy shifts the burden of
the corporate tax from capital to labor but the degree to which a country is open does not have an
impact. This would result in a coefficient close to zero. So why could the coefficient on the
interaction term be positive? It may be that as an economy becomes more open, corporations are
better able to avoid taxes. There is a large literature discussing the degree to which corporations
actively avoid taxes by transfer pricing, debt/equity reallocation, and placement of branches.16
Thus, it seems plausible that an increase in openness could result in an increase in the availability
of practices that aid tax avoidance.
If it is true that as the economy becomes more open, corporations are more likely to avoid
corporate taxes, then we would expect the average corporate tax rate to account for this
avoidance. The average corporate tax rate is calculated by dividing the total foreign earned
17