Corporate Tax

Who bears the burden of corporate taxes? Reviewing the proof

The Biden government is committed to not collecting taxes on anyone who earns less than $ 400,000 a year. However, the government’s corporate tax proposals would likely violate that promise, as businesses are made up of people who may also earn less than $ 400,000.

The economic evidence suggests that, in the long run, workers and consumers are more likely than shareholders to bear a significant portion of the corporate tax burden. Closer examination of some of this evidence shows that many vulnerable groups would likely be affected by these corporate tax changes.

Fuest et al. (2018) find that just over half of the corporate income tax burden falls on employees. The study links municipal administrative data with company-level microdata so researchers can accurately assess the impact of corporate tax changes on wages. Various effects on workers are identified in the paper. Higher corporate taxes cut wages for the low-skilled, women and young workers the most. While many politicians view corporate taxation as a form of progressive taxation, the authors show that incorporating these estimates of tax incidence would reduce the progressiveness of the US tax system by 25 to 40 percent.

Fuest et al. also find different effects between companies. In the case of companies regulated by collective agreements, the wage reaction to corporate tax changes is almost twice as great as the average effect. The wages of small and medium-sized companies, which make up almost 95 percent of all companies in Germany (similar to the US), react most strongly to changes in corporate taxation. However, for large and foreign-owned companies with significant profit-shifting opportunities, the impact of corporate tax increases on wages has been near zero. This suggests that a higher enterprise rate combined with efforts to reduce profit shifting would hurt workers in these larger companies in the long term.

Aside from the workers, Baker et al. (2020) note that consumers could also be affected by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage point increase in the corporate tax rate increased retail prices by 0.17 percent. If you combine this estimate with that of Fuest et al. estimated wage response, the authors calculated that 31 percent of the corporate income tax incidence is attributable to consumers, 38 percent to employees, and 31 percent to shareholders.

The authors found that the impact of corporate taxes varied between products and companies. The prices of cheaper goods were almost twice as responsive to corporate tax changes as the prices of higher-priced goods. Firms with higher levels of debt due to leverage preferences in tax law were less likely to pass corporate tax changes on to consumers. Finally, the impact on prices has been greatest for products more likely to be bought by low-income households, suggesting that corporate tax is likely to be less progressive than is commonly claimed.

Low-income households were disproportionately affected by the economic downturn caused by the pandemic. As the economy continues to recover, lawmakers should be wary of measures that could further harm this group. Instead of increasing corporate taxes, they should consider other ways to increase revenue and make tax law more progressive.

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