Passing the burden: corporate tax incidence in open economies

interaction. These results are reported in Table 10 and find mild evidence that the average
corporate tax rate affects the return to education. It is estimated that a one percentage point
increase in the average corporate tax rate decreases the return to a high level of education (over
low) by 0.44 percentage points.

The results presented here show little evidence that the burden of the corporate tax
increases with skill-level. This contradicts the predictions drawn from the capital-skill
complementarity hypothesis. One possible explanation is differences in labor mobility across
skill-level. If high-skill workers are more mobile than low-skill workers, they may be able to
avoid some of the corporate tax burden. These results combined with the substantial shifting of
the corporate tax burden from capital to labor suggest that the incidence of the corporate tax is
much less progressive than originally believed.

4.4 The Magnitude of Labor’s Burden

Estimates suggest that a one percentage point increase in the average corporate tax rate,
decreases annual gross wages by .9 percent. What does this imply about labor’s burden of the
corporate income tax? In 2000, the U.S. collected 207 billion dollars in corporate income tax
revenue.¹⁷ If the U.S. increases the average corporate tax rate from 20 percent to 21 percent and
the tax base remains constant, corporate tax revenues should increase by 10.4 billion dollars.
Total wages in the U.S. in 2000 were 4.8 trillion dollars; a 0.9 percent fall in total wages
decreases wages by 43.5 billion dollars.¹⁸ These data suggest that the marginal burden on labor
of a one percentage point increase in the corporate income tax rate is 4.2 times the additional
corporate tax revenue collected. Although this burden seems large, Harberger’s (1995) estimate
of labor’s burden cannot be rejected in my results. The 95 percent confidence interval for

20

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