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The Direct Incidence of Corporate Income Tax on Wages

46 Pages Posted: 8 Nov 2010  

Wiji Arulampalam

University of Warwick - Department of Economics; IZA Institute of Labor Economics

Michael P. Devereux

Centre for Business Taxation, Oxford University; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR); University of Oxford - Said Business School; University of Oxford - Said Business School

Giorgia Maffini

University of Oxford - Said Business School

Abstract

We examine the extent to which taxes on corporate income are directly shifted onto the workforce. We use data on 55,082 companies located in nine European countries over the period 1996-2003. We identify this direct shifting through cross-company variation in tax liabilities, conditional on value added per employee. Our central estimate is that the long run elasticity of the wage bill with respect to taxation is -0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. We find only weak evidence of a difference for multinational companies.

Keywords: income tax, wage bargaining, effective incidence

JEL Classification: H22, H25, J50

Suggested Citation

Arulampalam, Wiji and Devereux, Michael P. and Maffini, Giorgia, The Direct Incidence of Corporate Income Tax on Wages. IZA Discussion Paper No. 5293. Available at SSRN: https://ssrn.com/abstract=1704266

Wiji Arulampalam (Contact Author)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
01203 523471 (Phone)
01203 523032 (Fax)

Michael P. Devereux

Centre for Business Taxation, Oxford University ( email )

Said Business School
Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Giorgia Maffini

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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