August 3, 2009

The Corporate Income Tax and Workers’ Wages: New Evidence from the 50 States

Download Special Report No. 169

Special Report No. 169

While state-local corporate tax revenue has remained relatively constant for several decades, bringing in roughly five percent of revenue, some states have significantly increased their reliance on corporate taxes while others have relied less on that revenue source.The average state corporate tax rate—defined as collections divided by state income—has risen from 2.6 percent several decades ago to 4.4 percent today.

This study examines this correlation between corporate tax rates and wages, and it finds a causal relationship. States with comparatively low corporate taxes have seen wages rise beyond what they would have otherwise. Specifically, a one percent drop in the average tax rate leads to a 0.014 percent rise in real wages five years later. In dollar terms, that means wages rise $2.50 for every onedollar reduction in state-local corporate income taxes.

The reverse is also true: A one percent hike in the average tax rate leads to a 0.014 percent drop in real wages, or roughly a $2.50 loss in wages for each one-dollar rise in corporate tax collections. These results add to a growing literature in the international arena that compares changes in corporate tax rates and workers’ wages. Altogether, this body of work draws into question the conventional wisdom that corporate taxes add to the progressivity of the tax system. If instead of burdening capital, the corporate tax primarily burdens labor, as this study finds, then the corporate incometax does not add to the progressivity of the tax system.

Key Findings:

  • States with high corporate income taxes have depressed their workers’ wages over the long term, while states with low corporate taxes have boosted worker productivity and real wages.
  • This finding is consistent with other research focusing on the international trend towards lower tax rates: high corporate taxes tend to depress real wages.
  • According to this study, on average, between 1970 and 2007, a one-dollar increase in the average state-local corporate tax rate caused a $2.50 dip in wages five years later, compared with lower-taxed states.
  • A growing body of literature is showing that the burden of corporate income taxes falls predominantly on labor.

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