Corporate Tax Burden on Labor: Theory and Empirical Evidence

Abstract

Distribution tables allow policymakers to assess where the burden of taxation falls among taxpayers with different income levels and other characteristics. This distributional analysis requires making assumptions about the incidence of each component of the tax system, including which individuals really pay each tax. In some cases, the statutory incidence is a good guide to the economic incidence. Government agencies such as the Congressional Budget Office, Treasury, and the Joint Committee on Taxation routinely assume that individual income taxes are borne by the individuals who are legally liable to pay them. In other cases, the economic incidence is obvious even though it does not match the statutory incidence. Agencies distribute excise taxes to consumers and the employer’s share of FICA to employees. Reality is more complicated, but these are fair simplifying assumptions.

When it comes to the corporate income tax (CIT), there is no standard assumption that is uniformly applied by those agencies. Statutory incidence provides no guidance because corporations are nothing but legal entities, and economic incidence is not obvious. While the CBO and Treasury have historically assumed that the CIT is borne by owners of capital, the JCT is wary of assigning incidence to any particular group of individuals. The JCT recognizes that distributing the tax to all owners of capital is controversial because some economists argue that shareholders could bear a disproportionate share of the burden relative to their ownership of capital or that employees could bear a large portion through lower wages. Rather than assign the burden incorrectly, their distribution tables ignore the incidence of the CIT altogether, an approach that has drawn criticism.

The assignment of the CIT incidence has important implications for the progressivity of the tax, and proper assignment is necessary for understanding how rate changes will affect people at the bottom of the income distribution. Benjamin Harris has shown that the CIT is very progressive under the assumption that the burden falls primarily on capital, less progressive if it falls evenly on capital and labor, and only partially progressive — through the first four quintiles of cash income — if the incidence falls primarily on labor. In other words, if the burden falls primarily on capital, the top quintile of cash income earners will forfeit a smaller percentage of their income to corporate income taxation than earners in the fourth or even middle quintile.

In this article, we argue that neither of the agencies’ assumptions — that capital bears 100 percent or that no one bears the tax — is valid. Both approaches fail to reflect recent empirical and theoretic research that finds workers bear a large portion of the burden of the CIT. In particular, the empirical studies suggest that distribution tables that allocate 50 percent or more of the burden to labor may be closer to the truth.

Keywords: corporate tax rate, corporate taxation, distributional effects