Monday, January 7, 2008

It's the employees who bear the burden of the Corporate Tax

A just released Treasury research paper shows who bears the burden of the corporate tax. Just when presidential candidates talk about increasing corporate taxes, just to squeeze those greedy, economy boosting, paycheck providing businessman, the Treasury research reaches the conclusion:

The incidence of the corporate income tax is an important issue for designing tax policy. Who bears the corporate income tax can affect overall conclusions about the progressivity of the tax system. Policy analysts have often made assumptions about how to allocate the corporate income tax in measuring the distribution of tax burdens.

A common assumption, based on theoretical models of tax incidence, is that capital (i.e. shareholders) bears the burden of the corporate income tax. Recent empirical work using cross-country data on corporate taxes and wages suggests reconsidering this assumption; labor may actually bear a substantial burden from the corporate income tax.

It shows how a 1% increase in the Corporate Tax will result, in the long run, in an almost 1% decrease in wages.

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