Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non Technical SummaryDo higher corporate taxes reduce wages? While this question has been discussed extensively in economics, compelling empirical evidence is still scarce. In this discussion paper, we exploit the specific institutional setting of the German local business tax -the most important German profit tax -to provide new answers to this old question. Explicitly, we use annual changes in the local business tax rates set by 11,441 German municipalities to show that a one euro increase in a firm's annual tax liabilities yields a decrease of the annual wage bill of 50 to 75 cents. This means that raising one euro of corporate tax revenue reduces local wages by up to three quarters of the revenue raised. We only find a negative effect on wages if firms are under a collective bargaining agreement.If workers are not represented by a trade union, the local business tax has no effect on the wage. The reason for this finding: workers which are represented by a trade union receive higher wages and have more to lose if corporate taxes increase. Consequently, high and medium-skilled workers experience relatively higher wage losses than low-skilled workers if corporate tax rates increase.In the public and political debates, arguments in favor of (higher) corporate taxes are often based on redistributive motives: allegedly rich firm owners are supposed to contribute to financing public goods and social safety nets by paying their fair share of taxes. Opponents of high corporate taxes often claim that eventually the tax burden is (fully) shifted to labor, being immobile in an international context. Our findings shed new light on this debate and show that the shifting of the corporate tax burden is more complex. First, if workers receive relatively high wages -e.g. through collective bargaining agreements -, they are likely to suffer from higher corporate taxes through wage decreases.If wages are low, employees do not have much to lose. Second, the analysis suggests that local corporate taxation might offer a possibility to prevent firm owners from shifting large(r) shares of the tax burden to workers. If labor is regionally mobile, competitive wages are determined within the regional or even the national labor market and should hardly respond to the tax changes in a small jurisdiction. Das Wichtigste in Kürze AbstractBecause of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by us...

Economic Integration, Corporate Tax Incidence and Fiscal Compensation

“…This can arise via various mechanisms depending on the time horizon and the labour market structure. The overall incidence of the corporate tax on wages can be decomposed into a direct effect in the short run and an indirect effect in the long run (Arulampalam et al., ; Fuest et al., ). The direct effect captures the incidence of the corporate tax on wages in the presence of a wage bargaining process, for given capital stock and output prices.…”

“…Besides controlling for the level of factor inputs, Fuest et al. () compare the level of tax incidence depending on whether or not firms are covered by collective bargaining agreements. Using panel of data on German local tax rates linked to matched employer–employee data, they find ‘a full incidence, consisting of the direct and indirect effect, of 77 cents’ (Fuest et al., 2012, p. 3).…”

“…() and Fuest et al. () show that an improvement in the relative bargaining power of firms weakens this direct tax incidence effect (because workers capture a smaller share of the quasi‐rent). Capital mobility plays no role in their models because the bargaining power and position of firms and workers are exogenous to the level of economic integration.…”

“…Thus far, empirical analyses of the tax–wage relation assess either corporate tax incidence on wages (Randolph, ; Desai et al., ; Felix and Hines, ; Dwenger et al., ; Arulampalam et al., ; Fuest et al., ; Clausing, ) or fiscal compensation for higher wage costs (Mittermaier and Rincke, ), and ignore the potential bidirectional nature of this relation. The first contribution of this paper therefore lies in simultaneously testing for both a tax incidence and a fiscal compensation effect in a data set comprising 24 OECD countries over the period 1982–2007.…”

Reformoptionen für den deutschen Finanzföderalismus

“…Einem Szenario begrenzter Reformen mit starker Status-quo-Orientierung steht dabei eine weitergehende Neukonzeption der föderalen Finanzbeziehungen in Anlehnung an die hybriden Reformmodelle der Literatur gegenüber. (Fuest, Peichl und Siegloch, 2013), betrachten viele Bürger die Gewerbesteuer kaum als spür-bare Belastung. Grundsätzlich würde sich ein Hebesatzrecht für die Einkommensteuer am einfachsten durch proportionale Zu-und Abschlagsrechte auf die festgesetzte Steuerschuld verwirklichen lassen (dies entspricht der Position der Deutschen Bundesbank, 2014).…”