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1 1 (September 29, 2021)

handle is hein.crs/govegjo0001 and id is 1 raw text is: Who Pays the Corporate Tax? Among the issues surrounding taxreformis who bears the burden of the corporate tax The burden could fall on stockholders, on capital owners in general, or on labor. This question is important for characterizing the distributional effects of the tax If the taxreduces the returns to capital, it falls largely on higher-income individuals who own relatively more of capital as sets and is progressive (i.e., the taxrises as a share ofincome as income rises). Ifit reduces wages, it falls on workers and it is less likely to be progressive. A considerable amount of economic researchhas appeared, especially in the past 10or 15 years, examining the incidence of the tax. That research is reviewed in detail in CRS Report RL34229, Corporate TaxReform:Issuesfor Congress, by Jane G. Gravelle. That review suggests that the evidence supports most or all of the burden falling on capital. Sometimes claims are made that the taxfalls on the corporation's customers (andby implication onpurchases in the economy). Only relative andnot absoluteprices matter in determining burden and aggregate realprices cannotrise in the economy due to taxes. A corporate tax would raise the prices of corporate goods but at the s ame time lower the price ofnoncorporate goods, with the overall effect on prices zero. Therefore, economic research has focusedon whichfactorofproduction(labororcapital) bears the burden, which is the more important is sue for distributional is sues. This research reflects two different approaches to empirical estimates of the burden: embedding behavioralresponses in a general equilibriummodel and reduced-formstatistical estimates. Behavioral Responses in a General Equilibrurm Model Since the 1960s, the standard approachto studying the corporate taxburden was through a generalequilibrium model. The modelthat prevailed for many years was one with a closed economy with a fixed capitalstock. This model shows that the burden falls on capital. The corporate taxcauses the return in the corporate sector to fall, and capitalmoves out of that sector and into the noncorporate sector. The contraction of the capitals tockin the corporate sectorcauses the rate ofreturnbefore taxto rise, restoring some of the original after-taxreturn, whereas the abundance in the noncorporate s ector causes the rate ofreturn to fall, spreading the burden to other capital income. It also causes prices to rise in the corporate sector and fallin the noncorporate sector. With a reasonable set of empirical assumptions, wages were largely unaffected and the burden fell around 100% on capital (bothcorporate and noncorporate). It could slightly exceed 100% or slightly fall short, but was always close to 100%. Economists thenbegan applying the model to an open economy in which the taxcould cause the capital stockto contractbecause capital could flow out to other countries. An important advantage of a model is that it can set the limits ofwhat mightbe expected. The first, simplest, models suggested that significant taxes could fall on labor. In the case of a smallopen economy with one good and with perfect capital mobility (i.e., investment flows to the highestrate ofreturn regardless oflocation) and where foreign and domestic products are perfect substitutes, the full burden of the taxfalls on labor income. Capital flows out of the country to the rest of the world causing the pre - taxreturn to rise and becauseprices must remain fixed (due to perfect product substitution) and capitalowners must earn their original after-taxreturn, only the wagerate adjusts, falling enough to offset therise in the pre -tax return. These are strict as sumptions; as they are relaxed, the burden is more likely to shift to capital. For example, applying the modelto a larger economy causes part of the burden to fall on capital. Empirical evidence also suggests that capital is not perfectly mobile (i.e., investing abroad is not a perfect substitute for investing at home). Relaxing that assumption causes a larger share to fallon capital as capitalcannot move as easily. Similarly, making foreign products imperfect substitutes for domestic products makes the economy less open and, again, causes more of the burden to fall on capital. Overall, using values fromthe empirical literature for the three major behavioral effects (how easily substitutable capital is across jurisdictions, how easily substitutable foreign products are for domestic ones, and how easily capital can be substituted for labor in production), as well as how capital intensive the corporate- tradable sector is compared with the economy as a whole, labor appears to bearbetween 20% and 40% of the burden; hence, the majority falls on capital. This analysis likely stillplaces too much of the burden on labor for s everalreas ons. First, some share of the profit that generates taxes is in the formof rents with the burden borne entirely by stockholders. Although little evidence is available on the share ofrent, that evidence suggests a shae of 10% to 20%. This share suggests a range of 15% to 36% falling on labor. Second, the analysis applies only to a fully source-based (territorial) tax in which the U.S. corporate taxapplies only to profits earned in the United States. U.S. taxes are Updated September 29, 2021

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