May 20, 2010
Jennifer C. Gravelle
May 20, 2010
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.
Who bears the burden of the corporate income tax? For years following the publication of Harberger's seminal paper in 1962, his conclusion-that the burden of the corporate tax tends to fall entirely on capital-has largely withstood modifications to his model's underlying assumptions. Those adjustments, however, were generally made within the context of a closed economy, in which none of the economic sectors were involved in trade with other countries. Introducing an open economy into the model would appear to shift the burden from capital toward labor, because labor is generally less mobile than capital, and, because capital owners could avoid domestic tax by shifting investment overseas. However, the few studies that have modeled corporate tax incidence within an open economy do not reach a consensus on the degree to which the tax burden is shifted to labor. Even with well-developed open-economy models, there are several issues in relying on this form of analysis to allocate existing corporate taxes, including the assumption that corporate taxes in other countries either do not exist or do not respond to changes in U.S. tax.
This review presents a detailed analysis of the assumptions in the open-economy models of the corporate income tax that account for differences in their findings, and it provides a central estimate of the corporate tax incidence based on those studies. The paper also considers an alternative approach that draws on the new view of property tax incidence, which distinguishes between national effects attributable to imposition of property taxes in numerous localities and excise effects that vary among states due to deviations from the implicit national tax rate. Under that approach, the corporate tax incidence can be viewed from a global perspective, taking into account excise effects that result from differences among countries in their corporate tax rates.