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Who Bears the Burden of the Corporate Tax in The Open Economy?

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Author Info
Jane Gravelle
Kent Smetters

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Abstract

This paper investigates the long-run incidence of the corporate income tax in an open-economy model calibrated with two economies: the United States and a larger mirror economy representing the rest of the world. Imperfect substitutability of domestic and foreign products plays a key role in limiting - often eliminating - the incidence borne by domestic labor. We reach two novel conclusions. First, contrary to conventional wisdom, our analysis reveals that most of the long-run incidence of the corporate income tax is not borne by domestic labor. Nor is much of it borne by landowners. This finding is usually true even at an implausibly large portfolio substitution elasticity. The incidence is typically borne by domestic capital, as in the original Harberger (1962) closed-economy model. Second, for those parameter values in which the incidence is not borne mostly by domestic capital, interestingly, most of the incidence is exported. The exportation of the incidence of the corporate income tax, which has received little or no attention in the previous literature, might motivate tax coordination between countries. These results are robust to a range of parameter values and model assumptions. Our model is also compatible with several empirical rigidities.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8280.

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Date of creation: May 2001
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Handle: RePEc:nbr:nberwo:8280

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H2 - Public Economics - - Taxation, Subsidies, and Revenue

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  1. Jorge Martinez-Vazquez, 2007. "Budget Policy and Income Distribution," International Studies Program Working Paper Series, at AYSPS, GSU paper0707, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
  2. George R. Zodrow, 2007. "Should Capital Income be Subject to Consumption-Based Taxation?," Working Papers 0715, Oxford University Centre for Business Taxation. [Downloadable!]
  3. Bev Dahlby, 2002. "Globalisation and the Future of the Corporate Income Tax," Taxation Discussion Paper #9, ATAX, University of New South Wales. [Downloadable!]
  4. Hatice Jenkins & Glenn Jenkins, 2007. "Incidence of the WTO Anti-Discrimination Rules on Corporation Income Taxation," Working Papers 1123, Queen's University, Department of Economics. [Downloadable!]
  5. Gilbert E. Metcalf, 2006. "Tax Incidence," Discussion Papers Series, Department of Economics, Tufts University 0607, Department of Economics, Tufts University. [Downloadable!]
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  6. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Documents 125, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  7. Alan J. Auerbach, 2005. "Who Bears the Corporate Tax? A review of What We Know," NBER Working Papers 11686, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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