Passing the burden: corporate tax incidence in open economies



revenue collected in the U.S. While this estimate is nearly twice as large as Harberger’s (1995),
his estimate that labor bears 2 to 2.5 times the corporate tax revenue cannot be rejected in my
estimates. In addition, Harberger estimates the burden of the corporate tax on labor but does not
include an estimate of the deadweight loss associated with the corporate tax.

Openness, as measured by total trade divided by GDP, also has a negative effect on
wages; a ten percentage point increase in openness is estimated to decrease annual gross wages
by four percent. The interaction of corporate tax rates with openness has a positive effect on
wages in the data. This is consistent with a model in which corporations are better able to avoid
taxes in more open economies. I examine this theory by comparing the effects of marginal and
average corporate tax rates on wages. In my data, the difference between marginal and average
corporate tax rates is positively correlated with openness suggesting that corporations are better
able to lower their average tax rate in more open economies. Further examination of this theory
would be an interesting addition to the tax avoidance literature.

To analyze completely the progressivity of corporate taxes, one must look at the effect of
corporate taxes across workers of differential skill. There are theoretical reasons to believe that
the effects of corporate taxation will vary across skill-level. Griliches (1969) finds that capital
and unskilled labor are more substitutable than capital and skilled labor, creating the capital-skill
complementarity hypothesis. The capital-skill complementarity hypothesis predicts that the
elasticity of substitution between capital and skilled labor is lower than the elasticity of
substitution between capital and unskilled labor. Bergstrom and Panas (1992) show the
robustness of this result in an empirical analysis using Swedish manufacturing data. The capital-
skill complementarity hypothesis suggests that the decrease in capital due to an imposition of
corporate taxes should have a larger effect on skilled labor, as opposed to unskilled labor. Thus,



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