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Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany

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  • Fuest, Clemens

    () (Ifo Institute for Economic Research)

  • Peichl, Andreas

    () (Ifo Institute for Economic Research)

  • Siegloch, Sebastian

    () (University of Mannheim)

Abstract

Because of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by using an 11-year panel of data on 11,441 German municipalities' tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with our theoretical model, we find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates, while the conventional indirect wage effect through reduced investment is empirically small due to regional labor mobility. High and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.

Suggested Citation

  • Fuest, Clemens & Peichl, Andreas & Siegloch, Sebastian, 2013. "Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany," IZA Discussion Papers 7390, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp7390
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    Keywords

    administrative data; wage incidence; business tax; local taxation;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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