Passing the burden: corporate tax incidence in open economies

average corporate tax rates suggests that the marginal burden of the corporate tax falls between
2.35 and 6.2 times the tax revenue collected.

Harberger’s finding that labor’s burden of the corporate tax may be 2 to 2.5 times the size
of corporate tax revenue collected reflects only labor’s burden of the tax and does not include
any burden from inefficiencies created by the tax. There are four potential margins from which
distortions may occur from imposing a corporate tax. A corporate tax creates an inefficient
allocation of capital between corporate and non-corporate firms within a country as Harberger
(1962) found in a closed economy model. An open economy creates an additional distortion of
capital allocation among countries. Corporate taxes create incentives for corporations to change
their behavior in order to avoid taxes; these changes may create inefficiencies. If the corporate
tax reduces wages and thereby reduces the return to skill, the corporate tax may create
inefficiencies by distorting the acquisition of education. The estimated large burden of the
corporate tax on labor is a good indication that the inefficiencies created by taxing corporations
in an open economy are substantial.

5. Conclusion

The empirical results presented here suggest that the incidence of corporate taxation is
more than fully borne by labor. I estimate that a one percentage point increase in the marginal
corporate tax rate decreases annual wages by 0.7 percent. The magnitude of the results predicts
that the decrease in wages is more than four times the amount of the corporate tax revenue
collected. These empirical estimates cannot reject Harberger’s (1995) theoretical estimate that
labor bears 2 to 2.5 times the amount of corporate revenue collected. The inefficiencies created

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