Who ultimately bears corporation tax?

Ultimately individuals must bear any tax burden. But it is not clear which individuals bear the ultimate burden of corporation tax. It could fall on the owners of the company, reducing their post-tax income. But it could also on suppliers, on consumers or – by reducing wages or the number or jobs – on the workforce. An innovative project in the Centre has used data from over 55,000 companies in nine European countries to ask how far corporation tax is shifted onto the workforce.

Our central finding is that, holding constant other factors, a reduction of £1 in the tax liability of a firm would in the long run raise the wage bill by 92 pence. This indicates a substantial part of the corporation tax liability is in fact borne by the workforce.

Note though, that since wages are deductible from tax, the rise in wages would induce a further fall in tax, which would be captured by the shareholders. For example, at a tax rate of 30%, tax would fall by a further 28 pence, allowing post-tax profit to rise by around 36 pence. The large effect of taxes on wages is therefore broadly consistent with the fact that, on average in these companies, the wage bill represents about two thirds of value added.