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.