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

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  • Jane Gravelle
  • Kent Smetters

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.

Suggested Citation

  • Jane Gravelle & Kent Smetters, 2001. "Who Bears the Burden of the Corporate Tax in The Open Economy?," NBER Working Papers 8280, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8280
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    References listed on IDEAS

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    1. Jane G. Gravelle, 1994. "The Economic Effects of Taxing Capital Income," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071584, January.
    2. Bradford, David F., 1978. "Factor prices may be constant but factor returns are not," Economics Letters, Elsevier, vol. 1(3), pages 199-203.
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    4. Sibert, Anne, 1990. "Taxing capital in a large, open economy," Journal of Public Economics, Elsevier, vol. 41(3), pages 297-317, April.
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    7. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    8. Feldstein, Martin, 1988. "Imputing Corporate Tax Liabilities to Individual Taxpayers," National Tax Journal, National Tax Association, vol. 41(1), pages 37-59, March.
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    10. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Introduction to "A General Equilibrium Model for Tax Policy Evaluation"," NBER Chapters,in: A General Equilibrium Model for Tax Policy Evaluation, pages 1-5 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Jorge Martinez-Vazquez, 2007. "Budget Policy and Income Distribution," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0707, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    2. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
    3. 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.
    4. Glenn P. Jenkins & Chun-Yan Kuo, 2013. "Taxing Mobile Capital in Free Trade Zones to the Detriment of Workers," Development Discussion Papers 2013-04, JDI Executive Programs.
    5. Alan J. Auerbach, 2006. "Who Bears the Corporate Tax? A Review of What We Know," NBER Chapters,in: Tax Policy and the Economy, Volume 20, pages 1-40 National Bureau of Economic Research, Inc.
    6. George R. Zodrow, 2007. "Should Capital Income be Subject to Consumption-Based Taxation?," Working Papers 0715, Oxford University Centre for Business Taxation.
    7. Meh, C├ęsaire A., 2008. "Business risk, credit constraints, and corporate taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2971-3008, September.
    8. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Document 125, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Sorensen, Peter Birch, 2004. "International tax coordination: regionalism versus globalism," Journal of Public Economics, Elsevier, vol. 88(6), pages 1187-1214, June.

    More about this item

    JEL classification:

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

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