Pethokoukis, Economics, Taxes and Spending

Can we please agree that workers probably bear some of the corporate tax burden? Science!

When economist try to model how corporate income taxes work in the real world, they find that Mitt Romney was right when he said, “Corporations are people, my friend.” Some chunk of the tax burden, perhaps a rather large chunk in the 40% to 75% range, falls on workers. Cutting the tax might just raise worker wages. HBR’s Justin Fox sketches the current state of the research:

If a country allows free capital flows and free trade and has a corporate tax rate much higher than that of its neighbors, investors can choose to buy shares in companies elsewhere that face a lower tax, and corporate management can choose to move operations abroad. Consumers, meanwhile, can buy from foreign suppliers. By comparison, workers are pretty immobile. It’s hard for them to switch employers, let alone countries. So the tax lands on them, in the form of lower wages and/or skimpier benefits. And as those at the top of today’s corporate hierarchies seem to have done a pretty great job of keeping their paychecks from being adversely affected, the impact is presumably greatest on those farther down in the organization.

That’s the theory, at least. These models are, as Jennifer Gravelle of the Congressional Budget Office pointed out in a 2010 summary of recent theoretical work, extremely sensitive to how open an economy is and how sensitive people are to incentives. Tweak the assumptions just a little, and you can get a very different result.

So in the past few years there’s been a determined attempt to answer the question empirically, with a flurry of new regression studies that dig through data across countries, states, or even 13,000 German communities to suss out where businesses’ tax burden lands. Gravelle has a 2011 summary of this work, and her chief conclusions are that the results are all over the place and the most dramatic ones just aren’t credible. But most of these studies do show some significant chunk of the corporate tax burden landing on workers, which is perhaps not yet conclusive but is really interesting.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

5 thoughts on “Can we please agree that workers probably bear some of the corporate tax burden? Science!

  1. To paraphrase the late, great Leona Helmsley, corporations unlike “little people” pay no taxes. Guess what, they don’t pay salaries, health care, retirement plans, fines, utility bills, raw materials, nada. Guess who willingly and gladly pay all of these, with no force of law, no SWAT teams, the money just pours forth?

  2. Are you really naive enough to believe that if corporate wages go down, labor in this country will get raises. Hogwash. Few corporations in this country will “share the wealth” with those who generate it for them. And in fact, those who attempt to do so currently are the subject of numerous articles about the corporate generosity and kindness. these can be counted on ones hands alone.

    • Gus: The topic is who pays corporate taxes. It has nothing to do with wages. GE and Ford to name a few pay little or no taxes. They “pay” armies of accountants, lawyers and lobbyists to ensure that. Guess who gladly and willingly pays the salaries of those armies?

  3. Can we please agree that corporations pay absolutely no tax whatsoever?

    It is all passed along in the price of the goods and services produced as a form of indirect taxation.

    Employees probably do suffer from the lower wages payable due to higher prices and therefore lower sales.

  4. Can we please agree that corporations pay absolutely no tax whatsoever?“…

    Corporations are people too so its not exactly factual to say the corporations don’t pay tax, all the people who draw some sort of paycheck from the corporation pay taxes…

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