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Wage Incidence of Local Corporate Taxation - Micro Evidence from Germany

  • Peichl, Andreas
  • Fuest, Clemens
  • Siegloch, Sebastian

In this paper we provide empirical evidence on the wage incidence of the German business tax, which is set at the municipal level. For our analysis, we use very rich administrative linked employer-employee panel data, covering 11 years, and link it to data on the business tax rates of about 11,100 German municipalities. On average 8\% of the municipalities adjust their business tax rate per year. We are thus able to exploit multiple quasi-natural experiments to identify the tax incidence on wages. While the unique German setting allows us to gauge general equilibrium wage effects, the detailed administrative data enables us to estimate heterogeneous incidence effects and to explore different channels of how the business tax burden is passed on. Consistent with our theoretical model, we find a negative direct effect of corporate taxation on wage, arising in a collective wage bargaining context. A one euro increase in the annual tax liabilities yields a 50 cent decrease of the annual wage bill. This burden is borne high- and medium-skilled labor. Furthermore, we show that the general equilibrium effect on wages is negligible in the context of our study due to the high regional labor mobility.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79916.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79916
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  3. 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.
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  8. Thomas K. Bauer & Tanja Kasten & Lars-H. Siemers, 2012. "Business Taxation and Wages: Evidence from Individual Panel Data," MAGKS Papers on Economics 201233, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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  10. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
  11. R. Alison Felix, 2007. "Passing the burden: corporate tax incidence in open economies," Regional Research Working Paper RRWP 07-01, Federal Reserve Bank of Kansas City.
  12. Bradford, David F., 1978. "Factor prices may be constant but factor returns are not," Economics Letters, Elsevier, vol. 1(3), pages 199-203.
  13. Barth, Erling & Zweimuller, Josef, 1995. " Relative Wages under Decentralized and Corporatist Bargaining Systems," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(3), pages 369-84, September.
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