Workers Pay the Corporate Tax With Lower Wages

Economist and Columbia Business School Dean R. Glen Hubbard writes in the WSJ that workers actually bear most of the corporate tax burden in the form of lower wages, and cutting the corporate tax rates would increase wages:

Who bears the corporate tax burden? Some may be tempted with a quick answer, "corporations." But that is clearly wrong. The Econ 101 admonition that people pay taxes -- in this case, suppliers of capital through lower returns, workers through lower wages, and/or consumers through higher prices -- remains true even when the tax is aimed at capital.

Recent research has cast an eye in a somewhat different direction, showing that the corporate tax may be borne not entirely (or even principally) by owners of capital, but by workers. Globalization plays a role. In an open economy, with mobile capital, a source-based tax like the corporate tax will lead to a capital outflow, reducing investment and productivity and wages.

A recent paper by the American Enterprise Institute analyzes data across countries and over time, concluding that for OECD countries, a 1% increase in corporate tax rates results in a 0.8% decrease in manufacturing wage rates.

Wage effects of this size suggest labor bears much of the burden of the corporate tax. In fact, workers collectively would be better off if they voted for higher taxes on labor with corresponding cuts in the corporate tax.

Cutting the corporate tax rate would be positive for investment, productivity and economic growth. It would also reduce a tax burden now borne in large part (or even entirely) by labor, bolstering wages.