Abstract
This study investigates the direct incidence of the corporate income tax (CIT) through wage bargaining, using an industry-region level panel data set on all corporations in Germany over the period 1998–2006. For the first time we account for employment effects which result from taxinduced wage changes. Workers share in reductions of the CIT burden; yet, the net effect of wage bargaining on the corporate wage bill, after an exogenous € 1 decrease in the CIT burden, is as little as 19 to 29 cents. This is about half of the effect obtained in prior literature focusing on wages alone.
Highlights
The issue of who effectively bears the burden of the corporate income tax (CIT) has not been settled so far, whether by theory or empirical work
In a standard OLS regression that does not account for group fixed effects, taxes have a positive effect on wage rates,34 which is inconsistent with theoretical predictions
In our analysis we focused on the wage bargaining channel and integrated employment and wage bill effects that arise from changes in the user cost of capital (UCC) due to changes in CIT (“user cost of capital effect”)
Summary
The issue of who effectively bears the burden of the corporate income tax (CIT) has not been settled so far, whether by theory or empirical work (for a review of tax incidence in general, see Fullerton and Metcalf 2002). CIT revenues constitute government income and a safeguard for personal income taxation, and an important means to increase the progressivity of the tax system This view would hold true if capital owners were generally wealthier and capital effectively bore the full tax burden. Our preferred instrumental variable estimation reveals that a one percentage point increase in the ATR reduces wages by 2.37% in the long run Based on this long-run semi-elasticity and accounting for the effects of wage bargaining and changes in user cost of capital on employment, our incidence calculations show that an increase of corporate tax revenue by 1 euro would reduce the wage bill by 0.47 euro; labor bears a little more than half of the burden of the CIT.
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