In Search of Corporate Tax Incidence

Abstract

This paper reviews existing theory and empirical evidence concerning corporate tax incidence. Corporate tax incidence is difficult to establish in theory since the burden of corporate taxation will depend on at least five crucial economic parameters. Further, even if these parameters can be agreed upon, theoretical models of corporate taxation neglect at least seven important considerations. Unfortunately, existing empirical work does not provide clarification, since much of the work either relies on inappropriate tests of general equilibrium tax incidence or suffers from data or methodological limitations. This paper attempts to improve knowledge in this area by undertaking a comprehensive series of analyses of multiple data sources on labor market outcomes and corporate taxation. The analyses are informed by open-economy general equilibrium corporate tax incidence models, and they focus on OECD countries over the period 1981-2009. Results indicate substantial uncertainty regarding what fraction of the corporate tax burden falls on labor, but there is no robust evidence that corporate tax burdens have large depressing effects on wages. These results stand in contrast to findings of other papers; I discuss several possible reasons for this divergence.