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Who Bears the Burden of Corporation Taxation? A Review of Recent Evidence

3 min readBy: Alex Durante

The Biden administration has pledged to not raise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es on anyone earning less than $400,000 a year. However, the administration’s corporate tax proposals would likely violate that pledge, given that corporations are comprised of people who also might earn less than $400,000.

The economic evidence suggests that in the long run, workers and consumers, rather than shareholders, bear a sizable share of the corporate tax burden. Reviewing some of this evidence in greater detail shows that many vulnerable groups would likely be impacted by these corporate tax changes.

In a large study of German municipalities over a 20-year period, Fuest et al. (2018) find that slightly more than half of the corporate tax burden falls on workers. The study links administrative data from municipalities with firm level micro data, allowing the researchers to precisely estimate the impact of corporate tax changes on wages. The paper notes several different effects across workers. Higher corporate taxes reduced wages the most for low-skilled, women, and young workers. While many policymakers view corporate taxation as a form of progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. ation, the authors show that accounting for these estimates of tax incidenceTax incidence is a measure of who ultimately pays a tax, either directly or through the tax burden. This burden can be split between buyers and consumers, or different groups in the economy. would reduce the progressivity of the U.S. tax system between 25 and 40 percent.

Fuest et al. also find differing impacts across firms. For firms governed by collective bargaining agreements, the wage response to corporate tax changes is nearly twice as large as the average effect. Wages at small and medium-sized firms, which account for nearly 95 percent of all firms in Germany (similar to the U.S.), respond the most strongly to corporate tax changes. However, for large firms and foreign-owned firms with significant profit-shifting opportunities, the effect of corporate tax hikes on wages was close to zero. This indicates that a higher corporate rate, combined with efforts to reduce profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. , would hurt workers in the long run at those larger firms.

Beyond workers, Baker et al. (2020) find that consumers could also be impacted by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage-point increase in the corporate tax rate increased retail prices by 0.17 percent. Combining this estimate with the wage response estimated in Fuest et al., the authors calculated that 31 percent of the corporate tax incidence falls on consumers, 38 percent on workers, and 31 percent on shareholders.

The authors observed that the effects of corporate taxes differed across products and firms. Prices of lower-priced goods responded nearly twice as much to corporate tax changes relative to prices of higher-priced goods. Firms with more leverage, due to preferences given to debt-financing in the tax code, were less likely to pass corporate tax changes on to consumers. Finally, the effects on prices were strongest for products that were more likely to be purchased by low-income households, indicating that corporate tax is likely less progressive than commonly asserted.

Low-income households were disproportionately impacted by the economic downturn due to the pandemic. As the economy continues to rebound, legislators should be wary of policies that could further harm this group. Instead of increasing corporate taxes, they should consider other options to raise revenue and make the tax code more progressive.