Incidence Of Corporate Income Tax Research Articles

Incidence of Corporate Income Tax: Estimates from Indian Manufacturing Firms


 
 
 
 The purpose of this paper is to examine the incidence of corporate tax on capital and labour in Indian manufacturing sector. The paper employs ‘Seemingly Unrelated Regression Method’ with add-up restriction based on the work of Desai, Foley and Hines (2007). The study shows that, for the manufacturing sector in India for the period 2005-19, the corporate tax has a significant adverse impact on both wages paid to employees and profit after tax. Capital owners bear 96.3% of the tax burden and labours bear only 3.7%. The adverse effect on wages is slightly higher in public firms than in private firms. The relative tax burdens of labour and capital remained the same in the pre-2008 global economic crisis and post-crisis periods. The impact on both wages and profits increase with age and size of firms but decrease with leverage. These results will be useful to policymakers and other stakeholders to take appropriate strategies to design the corporate tax policy such that it is more redistributive, and not a burden for labour in manufacturing firms in India. The paper contributes to the scant empirical literature on corporate tax incidence.
 
 
 

Is VAT Also a Corporate Tax? Untangling Tax Burdens and Benefits for Companies

The Great Financial Crisis has increased concerns about whether corporations are paying a ‘fair’ amount of tax in different countries. This begs the question of what a ‘fair’ amount of tax is. The question is complicated by the continuing lack of clarity about the economic incidence of corporate income tax. Recently, it has been argued that the location of the sales revenue (turnover) of a corporation is relevant in determining the fair allocation. Of course, in many countries there is already a tax based on sales, value-added tax (VAT), also called goods and services tax (GST). This paper explores an illustration, arising from a series of cases before the European Court of Justice, of how VAT can impose a burden on corporations. The illustration raises issues of principle for VAT, but also offers lessons about how we tax corporations, particularly given proposals such as for digital sales taxes in the EU and the idea of a destination-based cash-flow tax included in legislative proposals in the US in 2016. This article explores the puzzles raised by the illustration and shows how it can throw light not only on the nature of VAT but also on the incidence of corporate income tax.

Could Employees Benefit from Corporate Income Tax Preference? An Analysis Based on Ownership and the Source of Tax Preference

The real effects of income tax preference have called great attention in both practical and academic world（Liu, et al., 2016）. Some studies find that tax preference could attract capital inflow and improve corporate donation, investment, financing, as well as RD Chen, et al., 2018）. However, some other studies find that tax preference could also restrain enterprise value increase（Zhang, et al., 2012; Zhang, et al., 2015）. Besides these consequences on the corporate level, the social effect of tax preference is directly connected with social welfare. Therefore, this paper examines the influence of tax policy from the perspective of corporate income tax preference allocation.Our paper discusses whether labor could benefit from corporate income tax preference using non-executive employee salary. And we further investigate how ownership and the source of tax preference affect the process of allocation. The empirical results show that corporate income tax preference increases non-executive employees’ salary and this effect exists only in state-owned enterprises. Relation-based tax preference would even decrease employees’ salary in non-state-owned companies mainly because managers with political connection might use the connection as bargaining power in the compensation negotiation with non-executive employees. We conduct instrumental variable analysis（2SLS）and construct a one-year lag in dependent variable to deal with the potential endogeneity problem, and our main results remain the same. We further conduct cross-sectional tests to investigate what factors affect tax preference allocation by dividing samples based on manager shareholding, provinces’ GDP per capita, local market competition, and the intensity of tax collection practice. Our results show that non-executive employees benefit less from tax preference in companies with more manager shareholding, higher GDP per capita, fiercer competition, and less intense tax collection practice. In all, our cross-sectional examinations show that managers’ bargaining power play a key role in tax collection allocation.This paper has the following possible contributions. First, our results prove that the theory of corporate income tax incidence（Harberger, 1962; Feldstein, 1974）is also applicable in China, and we show that ownership and the source of tax preference could affect this process. Second, this paper finds that non-state-owned companies’ managers with political background are less likely to increase non-executive employees’ salary when tax preference is relation-based, which enriches the research on the influencing factors of employee compensation. Third, the results show that reducing tax burden for enterprises could improve the quality of employment, which is in line with the requirements of improving the institutional mechanism of distribution according to factors” proposed by the 19th National Congress of CPC. However, the fact that ownership and the tax preference source have a significant influence in deciding non-executive employees’ salary is enlightening to policy-makers.

Who Bears the Corporate Tax Incidence? Empirical Evidence from India

Against the backdrop of corporate tax policy changes in India, the paper attempts to measure the incidence of corporate income tax in India under a general equilibrium setting. Using seemingly unrelated regression coefficients and dynamic panel estimates, we tried to analyze both the relative burden of corporate tax borne by capital and labor and the efficiency effects of corporate income tax. The data for the study is compiled from corporate firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) for the period 2000–15. Our empirical estimates suggest that in India capital bears more of the burden of corporate taxes than labor. However, the results vary with different proxies of capital used in the models. Though it is contrary to the Harberger (1962) hypothesis that the burden of corporate tax is shifted to labor rather than capital, it confirms the existing empirical results in the context of India.

Corporate Tax Incidence in India

The paper attempts to measure the incidence of corporate income tax in India under a general equilibrium setting. Using seemingly uncorrelated regression coefficients and dynamic panel estimates, we tried to analyze both the relative burden of corporate tax borne by capital and labor and the efficiency effects of corporate income tax. The data for the study is compiled from corporate firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) for the period 2000-15. Our empirical estimates suggest that in India capital bears more of the burden of corporate taxes than labor. Though it is contrary to the Harberger (1962) hypothesis that the burden of corporate tax is shifted to labor rather than capital, it confirms the existing empirical results in the context of India.

The direct incidence of corporate income tax on wages

A stylised model is provided to show how the direct effect of corporate income tax on wages can be identified in a bargaining framework using cross-company variation in tax liabilities, conditional on value added per employee. Using data on 55,082 companies located in nine European countries over the period 1996–2003, we estimate the long run elasticity of the wage bill with respect to taxation to be −0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. Only a weak evidence of a difference for multinational companies is found.

Behavioral Consequences of Optimal Tax Structure - Empirical Analysis

The aim of the paper was to analyze some behavioral effects, especially the effect of “hidden” tax, the “preference of progressivity” effect and some kind of “preference of short period incidence” effects of citizen. The effects predict the citizens will prefer hidden taxes to direct levies. The behavioral experiments revealed that additional information concerning the “hidden” tax and tax progressivity influences the preferences of respondents. They started to prefer the different ways of financing the public goods, those more progressive. Effect of “hidden” tax substantially diminishes after the prompting of information concerning the true tax incidence of corporate income tax. At the beginning the corporate income tax was preferred all over the groups, but later it lost its dominance and the alternative personal income tax became the favorable way how to finance of public goods. It is evident the relevant information concerning the real tax incidence and the redistributional effects of particular tax measures can significantly change the citizens view how to construct the preferred tax mix. It might also affect the process of political negotiation and reasoning.

The Direct Incidence of Corporate Income Tax on Wages

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.

Corporate Income Tax Reform: The Neglected Issue of Tax Incidence

The ‘double taxation’ of corporate income is often used as an argument in support of the integration of company and shareholder taxes, as occurred with the introduction of tax imputation in 1987 in Australia. These arguments are based, often implicitly, on the premise that the economic incidence of company taxes falls on shareholders receiving dividend income. However, a review of the available theoretical and empirical literature fails to provide an unambiguous answer to the corporate income tax incidence question. Empirical results presented in this paper suggest the existence of significant forward shifting of the tax on to consumers though higher prices in the case of Australian manufacturing corporations. A more informed discussion of tax reform must therefore consider more carefully the implications arising from the likely existence of significant forward shifting of the corporate income tax.

Sector-Specific Unemployment and Corporate Income Tax Incidence: A Geometric Exposition

This paper examines the incidence of the corporate income tax using duality theory for a two-sector general equilibrium model in which the economy experiences sector-specific unemployment and perfect capital mobility with a sector-specific rigid-wage in the corporate sector. Utilizing the simple geometry without the complicated mathematical manipulations required in the previous works, we demonstrate that capital always bears more of the corporate tax burden than does labor, while unemployment and national income unambiguously decline.

Corporate income tax incidence in the presence of sector-specific unemployment

This paper explores the implications of sector-specific unemployment in the analysis of the corporate income tax incidence. The analysis builds on a modified Harris-Todaro framework in which the corporate wage is indexed to commodity prices while the noncorporate wage is flexible. We present the sufficient conditions under which a tax burden falls more heavily upon capital and contrast them with the original Harberger results. Also examined in this paper is the incidence of unemployment benefits and their effects on the unemployment rate.

A general equilibrium model of the incidence of corporation income tax under uncertainty

In this paper we investigate the incidence of the corporation income tax in terms of a two-sector, general equilibrium model, where production decisions are made under uncertainty. The conventional result, derived originally by Harberger (1962), is that if the corporate sector is the capital-intensive sector, then capital must bear a greater burden of the tax, in proportion to its initial share in national income, than labor. This result continues to hold unambiguously under uncertainty only if the relative and the absolute risk aversion of the corporations are non- increasing in profits. Otherwise, the Harberger result may not hold.