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Do higher corporate taxes reduce wages? Micro evidence from Germany

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

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.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-039.

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Date of creation: 2013
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Handle: RePEc:zbw:zewdip:13039
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  1. Arulampalam, Wiji & Devereux, Michael P. & Maffini, Giorgia, 2012. "The direct incidence of corporate income tax on wages," European Economic Review, Elsevier, vol. 56(6), pages 1038-1054.
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  15. Gartner, Hermann, 2005. "The imputation of wages above the contribution limit with the German IAB employment sample," FDZ Methodenreport 200502_en, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
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  17. 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.
  18. Thomas K. Bauer & Tanja Kasten & Lars-H.R. Siemers, 2012. "Business Taxation and Wages – Evidence from Individual Panel Data," Ruhr Economic Papers 0351, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
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