Who Carries the Burden of Taxes on Corporate Profits? – Lessons from Experiences with Germany's Trade Tax

The tax rates on corporate profits have been falling for a long time. In view of the rising mobility of companies, several countries are lowering their tax rates in order to attract investment and jobs. Whether and how tax policy should react to tax competition and lower the tax rates on corporate profits is also a key issue in Germany. But who bears the economic burden of corporate taxation? According to estimates by the ifo Institute, a considerable share of the burden of corporate taxes is not borne by its owners, but is passed onto workers through low wage growth. This analysis shows that rising trade taxes primarily lead to significantly lower wage growth among poorly-qualified workers, young workers and women, who frequently play the role of secondary earners in Germany. German Länder where municipalities implement high trade tax assessment rates in order to generate additional tax revenues pay a high price in the form of lower wages. That is why tax system reform should not focus on the distribution effect hoped for from corporate taxes, but on the issue of how corporate taxation impacts a location's attractiveness in terms of investment and job creation.