The just-published March 2013 issue of The National Tax Journal, the principal academic journal devoted to tax analysis, contains four articles by top scholars who have sought to clarify the incidence of the corporate income tax. Unfortunately, there is no consensus.
The first article, by a Reed College economist, Kimberly Clausing, supports the traditional idea that capital bears all of the corporate tax. She notes that large multinational corporations have a great deal of flexibility in determining where to locate production, incur costs and realize profits.
A company may borrow in one country and take the deduction for interest there, locate actual production facilities and employ workers in another country, and realize profits in a third country by transferring intellectual property such as patents there or by adjusting prices on internal sales among its foreign subsidiaries.
Moreover, Professor Clausing notes, corporate shareholders may live in many different countries, each facing a different tax regime with respect to the taxation of dividends and capital gains.
For these reasons, she argues that it is impossible for workers to bear any significant portion of the corporate tax in the form of lower wages. It all falls on capital. A second article, by Jennifer Gravelle, a Congressional Budget Office economist, agrees with this conclusion.
But a third article, by an Oxford University economist, Li Liu and a Rutgers economist, Rosanne Altshuler, argues in favor of the idea that labor bears most of the burden of the corporate tax.
They take advantage of the fact that different industries bear different tax burdens because of various provisions of the tax law, and also that concentration and competition varies among industries. They empirically examine wages among industries and conclude that labor bears about 60 percent of the corporate tax burden.
That is, a $1 increase in corporate taxes will reduce wages by about 60 cents.
Finally, four Treasury Department economists detail the method the Treasury uses to allocate the corporate tax in distribution tables. They have the advantage of access to actual corporate tax returns and far greater detail on corporate finances than available to private researchers.
The Treasury economists conclude that 82 percent of the corporate tax falls on capital and 18 percent on labor. This is very close to the methodology of the private Tax Policy Center, whose analyses are frequently cited in policy debates. It assumes that 80 percent of the corporate tax is borne by capital and 20 percent by labor.
