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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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