The Incidence of the Corporate Income Tax on Wages

Much of the focus in the recent literature and in policy discussions concerns the allocation of the burden of the CIT between owners of capital and labour. [...] However, the magnitude of this effect depends critically on several modelling assumptions and parameter values related to the size of the country, the degree of capital mobility, the nature of competition in the output market, etc. [...] On the whole, our reading of the emerging empirical research and the theoretical literature that underlies it, suggests that the evidence is building that some, and perhaps a great deal, of the burden of the CIT is borne by labour in the form of lower wages, both directly and indirectly, particularly in small open economies. [...] Because of the way the tax rate variable is constructed, the coefficient estimate can be interpreted as the long-term effect of the CIT rate on the capital/ labour ratio. [...] We compute the indirect effect of the corporate income tax rate on wages (through its effects on capital stock) using the estimated coefficient on log(CIT ) in the K/L equation and the estimated coefficient on log(K/L) in the wage rate regression.