More on How Corporate Taxes Chase Away Corporations and Jobs

January 22, 2014

Owen Zidar, a doctoral candidate at the University of California-Berkeley, and Juan Carlos Suarez Serrato, an economist at Stanford, are challenging the idea that corporate taxes chase away corporations, as well as the accumulating evidence. They write in the Washington Post:

“In recent decades, American workers have suffered one body blow after another.” So writes economist Laurence Kotlikoff, who has just the policy prescription to help those ailing workers: abolishing the corporate income tax.

You can expect to hear this proposal a lot more often as the nation’s debate over widening income inequality heats up. But know this: Our new research suggests that Kotlikoff is wrong – that eliminating corporate taxes would help shareholders more than workers, likely making inequality worse.

The corporate tax incidence, i.e. who actually is harmed by the corporate tax, is a matter of considerable debate. As Zidar and Serrato acknowledge, the conventional view among economists is that the corporate tax falls mostly on labor (contrast that with the Joint Committee on Tax, which believes only 25 percent falls on labor). Zidar and Serrato have produced what they think is a more realistic model where firms are somewhat monopolistic and tied to a particular place. Think of the high-tech firms in Silicon Valley. Using this model, Zidar and Serrato find that 40 percent of the corporate tax falls on shareholders, 35 percent on workers, and 25 percent on landowners. However, they acknowledge that workers likely bear a larger share of federal corporate taxes, which represents the vast majority of the corporate tax burden in the U.S.:

To be clear, our results are from tax changes across states and not countries. Workers are more likely to move to a different state than to a different country, so workers would benefit more from cutting corporate taxes at the national level than they do at the state level.

That means it is still likely the case that most of the corporate tax burden as we know it, i.e. coming mostly from the federal government, falls on labor. This is one reason why virtually every developed country except the U.S. has lowered their corporate taxes in recent years, leaving the U.S. with the highest corporate tax rate in the developed world and yet paltry corporate tax revenue. U.S. corporations are leaving. There are now fewer U.S. corporations than at any time since the 1970s. With them goes millions of jobs and billions of dollars of tax revenue. Mainly, U.S. workers pay the price.

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