Workers Pay the Burden of Higher Corporate Taxes
Democratic front-runner Obama wants to raise corporate taxes, and taxes on capital gains and dividends. John Edwards says he will stand up to the interests in Washington that run government for the "glorification of corporate profits," as he has been regularly condemning the top six oil companies for collecting over $477 billion in profits over the past six years and often criticizing Exxon Mobil for earning $40 billion last year, the largest annual corporate profit in history.
But who actually bears the burden of higher corporate taxes? The standard assumption is that shareholders absorb the impact of higher corporate taxes, and not workers. But a new Treasury research paper, "A Review of the Evidence on the Incidence of the Corporate Income Tax," questions that assumption:
From the paper's conclusion: The incidence of the corporate income tax is an important issue for designing tax policy. Who bears the corporate income tax can affect overall conclusions about the progressivity of the tax system. Policy analysts have often made assumptions about how to allocate the corporate income tax in measuring the distribution of tax burdens.
A common assumption, based on theoretical models of tax incidence, is that capital (i.e. shareholders) bears the burden of the corporate income tax. Recent empirical work using cross-country data on corporate taxes and wages suggests reconsidering this assumption; labor may actually bear a substantial burden from the corporate income tax.
Empirical evidence from three different studies cited in the paper includes:
1. It is estimated that 61% of any additional corporate tax is passed on in lower wages in the short run, and around 100% in the long run.
2. Using cross-country panel data from the Luxembourg Income Study, it is estimated that a 10% increase in the corporate tax rate decreases annual gross wages by 7% percent.
3. The results in this paper suggest that corporate tax rates affect wage levels across countries, and that higher corporate taxes lead to lower wages. A 1% increase in corporate tax rates is associated with nearly a 1% drop in wage rates.
Bottom Line: Corporations don't pay taxes, individuals pay taxes in their roles as shareholders, workers and consumers. Higher corporate taxes translate to lower dividends for shareholders, lower wages for workers and/or higher prices for consumers. According to the empirical evidence presented in this paper, it appears that a substantial burden of increases in corporate taxes fall on the workers employed by corporations. Higher corporate taxes = lower wages.
(HT: Ben Cunningham)