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Posted by: Michael Mandel on December 19
Yesterday I went to the International Tax Policy Forum conference, “Who Pays the Corporate Tax in an Open Economy?”. By choice, I don’t attend many conferences, but after this one, I may have to go more often, because I saw a vision of the tax future (and no, I wasn’t smoking anything).
The topic of the conference was who bears the burden of the corporate income tax—that is, who ultimately pays the cost of it. Historically, the assumption has been that the burden of the corporate income tax falls on shareholders, or on capital in general. In either case, it is assumed to be a progressive tax.
But I walked away from the conference feeling like there was convincing evidence that in a global economy, that much of the burden falls on labor. The key session had a presentation of a new paper by Mihir Desai, Fritz Foley, and Jim Hines, and a discussion by Kevin Hassett. The conclusion of the Desai-Foley-Hines paper was that 45%-75% of the burden of corporate taxes is borne by labor (looking at multinational companies). (I can’t find an online link for the paper…when I get it, I will link).
More importantly, the results in this paper accorded with a paper that Hassett did with Aparna Mathur last year, which showed that higher corporate taxes have a negative effect on manufacturing wages in a country.
Now, if these results hold up, they are very important from a political point of view. The corporate income tax occupies a very interesting position in the tax structure. It doesn't bring in very much money, compared to the personal income tax or the payroll tax. And it's kind of funky from a theoretical perspective, since corporate profits mostly get taxed at the individual level as well.
The main justification for the corporate income tax is its progressivity--and if it's not progressive, there goes a lot of its political support.
With the corporate income tax on the table, it may be possible to get movement towards a "big" reform of the tax system. Which direction? Not clear yet. But I know something important when I see it.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.