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Do state corporate income taxes reduce wages?

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  • R. Alison Felix

Abstract

Amid falling revenues and impending budget shortfalls, state policymakers must find ways to increase revenue, cut spending, or both. At the same time, they must develop policies that attract or keep businesses and jobs. Some policymakers may consider raising corporate tax rates because it avoids directly taxing workers who are already suffering the effects of this recession. But as states reevaluate their current tax policy, it is important to consider the effects of each tax component. One important question is: Who will bear the burden of the taxes? ; State corporate income taxes are complex, and thus the answer to this question is far from obvious. Many believe that the state corporate tax structure is highly progressive because the corporate capital taxed is owned disproportionately by wealthy individuals. In today's economy, however, the burden of the corporate tax may have shifted to consumers or labor, resulting in a less progressive tax structure. ; Research has shown that in some cases labor bears a substantial weight of the corporate tax. While this burden has fluctuated over time, the relationship between corporate taxes and wages has been consistently negative. In other words, higher corporate taxes are typically associated with lower wages. ; Felix examines the impact of state corporate taxes on wages. She shows that corporate taxes reduce wages and that the magnitude of the negative relationship between the taxes and wages has increased over the past 30 years. She also finds that state corporate taxes have a larger negative effect on more highly educated workers.

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Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2009)
Issue (Month): Q II ()
Pages: 77-102

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Handle: RePEc:fip:fedker:y:2009:i:qii:p:77-102:n:v.94no.2

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Cited by:
  1. Dwenger, Nadja & Rattenhuber, Pia & Steiner, Viktor, 2011. "Sharing the burden: Empirical evidence on corporate tax incidence," Discussion Papers 2011/19, Free University Berlin, School of Business & Economics.
  2. Timothy J. Goodspeed, 2012. "The Incidence of Bank Regulations and Taxes on Wages: Evidence from US States," CESifo Working Paper Series 4026, CESifo Group Munich.
  3. Yihua Yu & Dan S. Rickman, 2013. "US state and local fiscal policies and non-metropolitan area economic performance: A spatial equilibrium analysis," Papers in Regional Science, Wiley Blackwell, vol. 92(3), pages 579-597, 08.
  4. Jennifer C. Gravelle, 2011. "Corporate Tax Incidence: A Review of Empirical Estimates and Analysis: Working Paper 2011-01," Working Papers 41511, Congressional Budget Office.
  5. Li Liu & Rosanne Altshuler, 2011. "Measuring the burden of the corporate income tax under imperfect competition," Working Papers 1105, Oxford University Centre for Business Taxation.

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