Corporate Tax Incidence: Is Labor Bearing the Burden of Corporate Tax?

This paper estimates the effect of the difference in the corporate tax rate (difference between the corporate tax rates in Japan and the average corporate tax rate abroad) on capital per worker and the effect of capital per worker on wages per worker based on a VAR model using a time - series data set of the Japanese manufacturing industry. In addition, the paper estimates how the effect of an increase of 1% in the difference in the corporate tax rate on the wage rate changes over a long period (the dynamic multiplier function). The main findings in this paper are as follows. First, the estimation results for the VAR model show that an increase in the average difference in the corporate tax rate over the past three years decreases capital per worker. It is also found that a rise in capital per worker in the previous period increases wages per worker. These findings suggest the presence of the following process of the corporate tax incidence: increase in the difference in the corporate tax rate Ë decline in capital per worker (decline in labor productivity) Ë decline in the wage rate. Second, the dynamic multiplier estimation based on VAR models with constraints shows that a rise of 1% in the average difference in the corporate tax rate over the past three years causes wages per worker to decline by only 20,000 to 25,000 yen in total over a 16 - year period. This finding suggests that the corporate tax burden on workers is small.