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Sharing the burden: Empirical evidence on corporate tax incidence

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  • Nadja Dwenger
  • Pia Rattenhuber
  • Viktor Steiner

Abstract

This study assesses the burden of capital income tax passed onto labor through wage bargaining over economic rents, using estimations based on a unique pseudo-panel data set from Germany for the period 1998 to 2006. Tax return data cover the universe of corporations subject to corporate income tax, and labor market variables reflect the full record of employees covered by Social Security. We find that wage bargaining after a reduction in tax rates does not increase the wage bill if employment effects neglected by previous empirical studies are taken into account. Any increase in the total wage bill by higher wage rates set is equally compensated for by lower levels of employment. If adjustments in employment due to the increased user cost of capital are taken into account, a cut in corporate income taxes by 1 euro increases the wage bill by 0.47 euro. The identification of these effects comes from variation in the firm-specific average corporate tax rate across firms and over time resulting from two substantial tax reforms. The endogeneity of the firm-specific tax rate is controlled for by an instrumental variable approach. The instrument for the observed average tax rate is the counterfactual tax rate that a corporation would have faced in a particular period, had there been no endogenous change of its tax base, constructed using a detailed microsimulation model.

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File URL: http://www.tax.mpg.de/RePEc/mpi/wpaper/Tax-MPG-RPS-2011-14.pdf
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Bibliographic Info

Paper provided by Max Planck Institute for Tax Law and Public Finance in its series Working Papers with number sharing_the_burden.

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Length: 39 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:mpi:wpaper:sharing_the_burden

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Keywords: tax incidence; wage determination; corporate income taxation; corporate tax return data;

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References

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Cited by:
  1. Mittermaier, Ferdinand & Rincke, Johannes, 2013. "Do countries compensate firms for international wage differentials?," Journal of Public Economics, Elsevier, vol. 102(C), pages 23-36.
  2. Liu, Li & Altshuler, Rosanne, 2013. "Measuring The Burden Of The Corporate Income Tax Under Imperfect Competition," National Tax Journal, National Tax Association, vol. 66(1), pages 215-37, March.
  3. Sara Torregrosa Hetland, 2014. "A fiscal revolution? Progressivity in the Spanish tax system, 1960-1990," Working Papers 2014/8, Institut d'Economia de Barcelona (IEB).
  4. Peichl, Andreas & Fuest, Clemens & Siegloch, Sebastian, 2013. "Wage Incidence of Local Corporate Taxation - Micro Evidence from Germany," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79916, Verein für Socialpolitik / German Economic Association.
  5. Fuest, Clemens & Peichl, Andreas & Siegloch, Sebastian, 2013. "Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany," IZA Discussion Papers 7390, Institute for the Study of Labor (IZA).
  6. Clemens Fuest & Andreas Peichl & Sebastian Siegloch, 2012. "Which Workers Bear the Burden of Corporate Taxation and Which Firms Can Pass It On? Micro Evidence from Germany," Working Papers 1216, Oxford University Centre for Business Taxation.

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