Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis: Working Paper 2010-03

Working Paper
May 20, 2010

By Jennifer C. Gravelle

This paper reviews the current evidence on the incidence of the corporate tax from Harberger-type general equilibrium models, with special attention to the open economy. The analysis identifies the major drivers of the results from open-economy models and compares estimates from four major studies that have examined corporate tax incidence in an open economy. The studies vary in the assumptions of critical elasticities, and the variations account for differences in the reported estimates. Adjusting the estimates from the studies to reflect central empirical estimates of key elasticities suggests that capital bears the majority of the corporate tax burden. This paper details drawbacks to the use of these models, such as their focus on the long-run when the adjustment from the short-run could be very long.

The paper also presents an alternative method for allocating the corporate tax burden. The proposed method draws on the new view of incidence of the property tax and, in a similar fashion, distinguishes between the global effects of corporate taxes and excise effects that vary among nations. In this view, capital bears the full burden of the worldwide average corporate tax. Deviations from the average worldwide corporate tax are allocated according to the central estimate derived from the review of the general equilibrium models of corporate tax incidence. This alternative method suggests that, even in an open economy, capital could bear virtually the entire tax burden and that the open-economy assumption is not sufficient to shift the burden of the corporate tax from capital to labor.