Passing the burden: corporate tax incidence in open economies

¹ Auerbach (2005)

² Jones and Kenen (1984)

³ Johnson and Stafford (1999)

⁴ Theory predicts that corporate tax rates will have a negative effect on wage rates in an open economy. In this
paper, I look at the effect of corporate tax rates on annual gross wages because of data availability. If labor is
perfectly inelastic, then the effect of the corporate tax rate will be exactly the same on wage rates and annual wages.
However, if labor is not perfectly inelastic, then corporate tax rates may have an impact on both wage rates and the
amount of labor employed. Thus, the effect of corporate taxes on annual wages should be weakly larger than the
effect on wage rates.

⁵ A good review of the returns to education and the human capital earnings function can be found in Card (1999).

⁶ Card (1999)

⁷ The Luxembourg Income Study is currently reviewing a sixth wave of data for many countries extending the data
to 2005.

⁸ An education recode is not available for the following countries: Canada, Czech Republic, Hungary, Israel and
United Kingdom. An education recode is not available in the early years for the following countries: Australia,
Austria, Finland, France, Germany, Luxembourg, Norway, Russia, Spain, Sweden and Switzerland.

⁹ I look at the effect of corporate taxes on the annual gross income of individuals as opposed to the wage rate of
individuals. Data on individual wage rates is available from the LIS but several problems exist with this data. First,
some countries ask individuals directly for wage rates; the accuracy of this information is questionable. More
problematic is that some countries have constructed the wage rate variable from measures of annual income and
hours worked. These data were constructed from either net or gross incomes, whichever is available for a specific
country. Because my results are specifically concerned with the effects of taxes on wages, the measure of wage rates
in the LIS data is not well-suited for my purposes.

¹⁰ These conversions may produce a wage distribution that is more equal than the actual wage distribution. In
calculating gross wages, I use the individual tax rate appropriate for the mean wage within a skill level. Therefore,
high income individuals may face a higher tax rate than I use in this calculation. This will be more problematic for
countries that have a highly progressive individual income tax regime.

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