New Directions in Corporate Tax Research
Paper Session
Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)
- Chair: Alan Auerbach, University of California-Berkeley
Incidence and Distributional Effects of the Corporate Tax: The Role of Excess Profits and Rent Sharing
Abstract
This paper links analysis of the incidence and distributional effects of the corporate income tax to evidence on rent sharing between firms and workers. Standard public finance analysis assumes that shareholders bear the burden of taxes on corporate excess returns, but a large empirical literature in labor economics shows that firms share rents with workers in general and high-income workers in particular. This implies that workers bear some of the burden of taxes imposed on excess returns and, perhaps counterintuitively, that the more market power workers have, the greater the share of the corporate tax they bear. We review theory and evidence on excess profits and rent sharing, including recent evidence on the heterogeneous distribution of shared rents, and incorporate new assumptions into the Tax Policy Center microsimulation model. We show that, relative to a baseline where shareholders bear all taxes on excess returns, allowing for rent sharing implies that labor bears more of the burden, but in many ways the tax is still at least as progressive as in the baseline analysis. Our analysis applies to other taxes that impose burdens on excess returns (e.g., value-added taxes) and points to the need to examine different types of labor in analysis of the incidence of the corporate income tax, in particular distinguishing between rank-and-file workers on the one hand and skilled workers, managers, and executives on the other.Corporate Taxes and the Earnings Distribution: Effects of the Domestic Production Activities Deduction
Abstract
This paper investigates how corporate tax changes affect workers’ earnings. We use a dataset of U.S. worker-level W-2 filings matched with corporate tax returns and study the implementation of the Domestic Production Activities Deduction (DPAD). We find the DPAD tax rate reduction has a substantial effect on the distribution of annual wage earnings within a firm. Earnings of workers at the top of their firm’s earnings distribution rise relative to those at the bottom of the distribution. We estimate a semi-elasticity of average earnings of 1.1 with respect to the DPAD marginal tax rate reduction, while the semi-elasticity of median earnings is notably smaller—0.5. Furthermore, we estimate a semi-elasticity of 1.3 at the 95th percentile of workers’ earnings and 2.7 at the 99th percentile. This trend of larger semi-elasticities at the top of the earnings distribution is especially pronounced for small firms. Looking at overall employment effects, we see no change overall, but the number of employees rises at small firms and declines at large firms. In contrast, we find that capital investment rises for large firms, suggesting that the DPAD also resulted in domestic capital-labor substitution for large corporations. Our paper has significant implications for assessing the progressivity of the U.S. tax code and for analyzing the effect of corporate tax policy changes on the U.S. income distribution.Discussant(s)
Alan Auerbach
,
University of California-Berkeley
Katarzyna Bilicka
,
Utah State University
Juan Carlos Suárez Serrato
,
Duke University
JEL Classifications
- H2 - Taxation, Subsidies, and Revenue
- J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining