Why It Matters
Decades of research on whether corporate income taxes fall primarily on workers or investors has produced wildly conflicting conclusions that leave core questions unresolved for policymakers, according to a new Congressional Research Service (CRS) report. The distribution of corporate tax burden shapes the stakes for both workers and capital owners. If the tax burden falls on capital income, it is progressive because capital is concentrated among higher earners. If it falls on wages, the tax becomes more regressive, disproportionately affecting lower- and middle-income earners. General equilibrium models, which impose mathematical structure on the problem, suggest labor bears roughly 20 percent of the corporate tax burden, while the Congressional Budget Office and Joint Committee on Taxation assign 25 percent to labor and 75 percent to capital.
A meta-analysis by Knaisch and Pöschel (2023) found a mean incidence of 500 percent of the tax falling on labor across studies, though the variation was so large that the mean finding was not statistically different from zero. This pattern reflects a deeper problem: publication bias likely inflates reported findings in corporate tax incidence studies, as studies showing no effect are less likely to be published or completed.
The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate from 35 percent to 21 percent in 2018.
The Big Picture
General equilibrium models impose a structure on findings and use estimates of capital flows across borders, capital-labor substitution, and import-domestic product substitution to determine labor's share of the corporate tax burden. Under the most favorable assumptions for labor bearing the burden in the Mutti-Grubert and Gravelle-Smetters models, roughly 70–74% of the corporate tax burden could fall on labor. Under central, empirically supported estimates of capital mobility, product substitution, and factor substitution, the labor share falls to approximately 20 percent.
The Mutti-Grubert model finds labor bears between 72 and 74 percent of the corporate tax burden under assumptions that lead to the highest burden on labor. The difference traces to the Mutti-Grubert model's assumption of an extremely low substitution elasticity of 0.05 between skilled labor and capital, forcing skilled labor to decline almost as much as capital when taxes rise, which causes most of the burden to fall on labor.
Reduced form statistical estimates use regression analysis to estimate the effect on wages of a change in corporate taxes. The Hassett and Mathur (2006/2015) cross-country study found that a dollar increase in corporate taxes reduces wages by $22 to $26. A 2007 CRS reanalysis of those results found that when wages were adjusted for purchasing power and other corrections were made, the effect became statistically insignificant. The Hassett and Mathur revised paper later indicated a decrease of $13 in wages for each dollar of increase in corporate taxes.
Cross-state studies have found even more extreme results, often exceeding 100 percent of the tax falling on labor once elasticities were converted to measures of incidence. Rent-sharing studies, which examine whether workers share in corporate rents (excess profits), find shares falling on labor that routinely exceed the theoretical maximum set by the estimated rent share of approximately 20 percent of profits.
Dobridge et al. (2021) found that the bottom 25 percent of workers saw no statistically significant change in wages from the domestic production activities deduction. Dobridge et al. (2021) found that the top 1% of workers saw wage increases 5.4 times the median. Kennedy et al. (2024) found that 49 percent of the 2017 tax cut's wage benefits went to chief officers and the top 10 percent of workers, with no effect on the bottom 90 percent.
The Bottom Line
Wages are affected by many factors, and the corporate tax is a small variable by comparison, making it difficult to isolate the tax's effects in statistical studies. The wide range of estimates, combined with evidence of publication bias, indicates that researchers cannot reliably determine the incidence of corporate taxes on wages from existing evidence.
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