in an open economy, we should expect wages of skilled labor to decrease by more than the
wages of unskilled labor as a result of higher corporate tax rates. Although wages of all types of
labor will be depressed by a corporate tax, theory suggests that the burden of corporate taxes is
borne more heavily by skilled labor especially as the economy becomes more open.
Past research provides the foundation to analyze the effects of corporate taxes and
openness on wages across skill-level. I find little evidence, however, that corporate taxes have a
larger negative effect on wages of skilled labor. In fact, results suggest that corporate taxes have
similar effects on annual gross wages for all skill groups. Differences in international labor
mobility may provide one explanation of these results. If high-skill labor is more internationally
mobile, then they can pass some of the burden of the corporate tax on to less mobile factors.
These results combined with the sizable inefficiencies created by corporate taxation suggest that
taxing labor directly may result in a Pareto-improving outcome with the same tax progressivity
of the current tax system.
A recent empirical contribution, Hassett and Mathur (2006), also finds that labor more
than fully bears the burden of corporate taxes in an open economy; they estimate that a one
percent increase in the corporate tax rate results in a 0.8 to 1.0 percent decrease in the
manufacturing wage rate. Using U.S. data, their results translate into a burden on labor that is
approximately five times the magnitude that I find.
The central motivation of this paper is to estimate the incidence of the corporate tax in an
open economy. In addition, I analyze these impacts across skill-level and find that openness may
lead to more active tax avoidance. A closer examination of the economic theory behind the
incidence of corporate taxes in an open economy follows in Section 2. The data used in the