Which workers bear the burden of corporate taxation and which firms pass it on?

The question of who bears the burden of the corporate income tax is important and controversial. Proponents of higher taxes on business argue that these taxes mostly fall on firm owners and thus redistribute income from ‘rich to poor’. Critics object that higher taxes on profits will not be borne by capital because capital is internationally mobile, with the burden of higher corporate taxes will be  shifted to immobile factors of production, in particular labour.

Empirical evidence on this question is scarce, especially on the type of labour which is most affected. This research provides evidence on the effects on wages of the German business tax, which is set at the municipal level. We use rich administrative linked employer-employee panel data, covering 11 years, and link it to data on the business tax rates of about 11,500 German municipalities. On average 8% of the municipalities adjust their business tax rate per year, and we use this variation to identify the tax incidence on wages.

Our central estimate is that a 10% increase in the effective corporate tax rate (say from 30% to 33%) reduces wages by 1.8%, an effect that takes two years to occur. This is largely borne by incumbent workers. Worker groups that are more vulnerable, such as low-skilled workers, women, part-timers and individuals with low firm-specific tenure share a relatively higher burden of the tax.

We find significant differences in this effect on wages between industries. Following economic intuition, firms shift a larger share of tax burden to their workers if the wage bargaining takes place at the  firm level rather than at the sectoral level and if wages exceed the minimum wage stipulated in a collective agreement. More profitable firms shift less of the burden.

Clemens Fuest, Andreas Peichl and Sebastian Siegloch, Which workers bear the burden of corporate taxation and which firms can pass it on? Micro-evidence from Germany, CBT Working Paper 12/16