Passing the burden: Corporate tax incidence in open economies

High rates of corporate taxation reduce corporate investment and thereby depress local wages. Using cross-country data from the Luxembourg Income Study, I estimate that a ten percentage point increase in the corporate tax rate of high-income countries reduces mean annual gross wages by seven percent. The results do not support the common belief that the burden of corporate taxes falls most heavily on skilled labor; corporate taxation appears to reduce the wages of low-skill workers to the same degree that it reduces the wages of high-skill workers. Interactions between corporate tax rates and measures of economic openness suggest that firms more effectively avoid corporate taxes as the economy becomes more open. The inefficiency of taxing corporate income, together with the incidence of the tax in the form of reduced wages, suggests that taxing labor instead of taxing corporations could be Pareto-improving.