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...

Formula Apportionment: Factor Allocation and Tax Avoidance

“…It has been argued that businesses may impose the local tax burden on their employees by reducing gross wages (Fuest et al, 2013). However, taking into account the binding force of labor market contracts and the tariff commitment of most German industries (especially in the manufacturing sector), this does not seem to be a likely explanation for the strong immediate tax effects on the Payroll per hour ratio found in our paper.…”

“…However, taking into account the binding force of labor market contracts and the tariff commitment of most German industries (especially in the manufacturing sector), this does not seem to be a likely explanation for the strong immediate tax effects on the Payroll per hour ratio found in our paper. While employment and incidence effects of taxes should have delayed effects (Fuest et al, 2013, Siegloch, 2014, our regression results rather imply a rapid effect from the tax rate differential on Payroll share, the Payroll per hour ratio and the Payroll per revenue ratio. Therefore, we find stronger effects of current TaxD on payroll compared to lagged TaxD.…”

“…Therefore, we find stronger effects of current TaxD on payroll compared to lagged TaxD. 14 Since Fuest et al (2013) argue that, due to collective rent dividing 13 Taking into account the tax-induced reduction of workings hours per employee, one might argue that part of the lower Payroll per hour ratio might be due to a reduction in overtime hours with corresponding overtime compensation. Taking into account that an increase in the tax rate by one percentage point reduces the Hours per employee ratio by 0.633 percentage points and the Payroll per hour ratio by almost the same value (0.545 percentage points), the impact of overtime compensation should be almost negligible.…”

“…However, we do not observe this pattern in our results. Note that Fuest et al (2013) perform calculations for payroll per employee and not for payroll per working hour. Hence, their calculations might be biased by changes in the number of working hours, as suggested by Table 5 and Table 6.…”

Die relative Steuerbelastung mittelständischer Kapitalgesellschaften: Evidenz von handelsbilanziellen Mikrodaten

“…an zu geringen Vorauszahlungen aufgrund des Konjunkturaufschwungs in diesen Jahren und an Erstattungen durch zu hohe Vorauszahlungen in den konjunkturschwachen Jahren davor liegen. Das Problem der sehr niedrigen geschätzten Last der kleinen Unternehmen im Jahr 1998 bei der vollen Stichprobe tritt nur innerhalb des Modells (3) ein größerer Teil der Unternehmenssteuern auf Lohnempfänger überwälzt wird (Arulampalam et al 2012;Bauer et al 2016;Dwenger et al 2013;Fuest et al 2015;Harberger 2008;Sinn 1985 26 Die Sonderveröffentlichung berichtet für die Jahre 1997 bis 2013 für kleine und mittlere KapG zusammen als auch für große KapG die Steuern vom Einkommen und Ertrag sowie das Jahresergebnis vor Gewinnsteuern. Hieraus haben wir analog zu unserem Vorgehen die Steuerlastquoten gebildet und verglichen.…”