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1 Stephen Entin, Labor Bears Much of the Cost of the Corporate Tax 1 (2017)

handle is hein.taxfoundation/labemcop0001 and id is 1 raw text is: SPECIAL REPORT No. 238 Oct. 2017 The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and local levels. We are a 501(c)(3) non profit organization. ©2017 Tax Foundation Distributed under Creative Commons CC BY NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org Labor Bears Much of the Cost of the Corporate Tax Stephen Entin Senior Fellow Key Findings Early analysis of the distribution of the corporate income tax relied on theoretical models and thought experiments. These hypothetical models assumed certain quantities of capital, market conditions, and investor behavior. The most important assumption in these models is how open the U.S. economy is to trade and the movement of capital. Open economy models concluded that nearly all the burden of the corporate tax falls on labor. Over the last few decades, economists have used empirical studies to estimate the degree to which the corporate tax falls on labor and capital, in part by noting an inverse correlation between corporate taxes and wages and employment. These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome. More recently, some analysts have suggested that super-normal returns due to monopoly rents or successful risk-taking impact the distribution of the corporate tax burden. Activity associated with rents is assumed to be insensitive to tax, limiting the amount of the tax that may be shifted to labor. U.S. Treasury and Tax Policy Center tax models adopt this approach, and assign most of the corporate tax to capital rather than labor (roughly an 80-20 split toward capital). There appear to be serious errors in both theory and measurement in the super-normal returns work. Replicating Treasury's methodology, we find it overstates the amount of super-normal returns being earned by businesses by two or three times. Correcting for the overstatement, and assuming such returns determine incidence, implies a business tax incidence that is roughly split 50-50 between capital and labor, more in line with the empirical literature.

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