Corporate taxes are a hot policy issue right now. The Trump administration has made tax reform one of its key initiatives and revived the debate (if it ever really went away) over what exactly constitutes a “fair share”.
Corporate taxes have long been viewed as a tax on America’s most wealthy, but emerging research suggests workers may be paying more of the corporate tax than previously thought.
To understand how corporate taxes are paid, one must know something about the nature of a firm. A corporation – or firm – is a legally recognized group of people working together to provide a service or product for a profit. All corporations exist utilizing capital and labor.
In this context, capital refers to the assets used in production, and labor refers to the workers a firm employs. Since capital is inanimate and incapable of paying taxes, the burden falls on either labor – the workers – or the owners of capital.
The traditional view of corporate tax incidence says that the owners of capital/shareholders pay the tax, or it is passed on to consumers. This view is based on dated models that fail to consider the effects of globalization.
The traditional view still holds credibility in the short-term, when capital is relatively fixed. However, in the long-term, capital cannot only move, it can take flight.
New research in the academic literature calls into question this popularized view. By looking at wages, researchers Li Liu and Rosanne Altshuler at the Oxford University Centre for Business Taxation found that workers pay an average of 60-80 percent of the corporate tax burden in America.
Other studies found a negative correlation between corporate tax rates and wages. Moreover, this phenomenon seems to be particularly pronounced for low-skill workers.
Theoretically, understanding how corporate taxes hurt workers is simple. Taxes reduce the amount of funds available for workers to bargain for; in other words, every dollar an employer pays the government is one less dollar workers can ask for. Additionally, forcing capital to bear the tax burden becomes more difficult as the global economy becomes more integrated and capital becomes increasingly mobile.
Although researchers have not reached a consensus on corporate tax incidence, policymakers should be mindful of the indirect cost taxes might impose on workers. Furthermore, because the U.S. has some of the highest marginal and effective corporate tax rates in the developed world , lowering them could provide a much needed boost to wages.
For lawmakers who want to increase wages and encourage growth,
cutting corporate taxes couldn’t hurt.