The Direct Incidence of Corporate Income Tax on Wages

Wiji Arulampalam, Michael P. Devereux and Giorgia Maffini

European Economic Review 56.6, 1038-1054. [2007]

Abstract

A stylised model is provided to show how the direct effect of corporate income tax on wages can be identified in a bargaining framework using cross-company variation in tax liabilities, conditional on value added per employee. Using data on 55,082 companies located in nine European countries over the period 1996–2003, we estimate the long run elasticity of the wage bill with respect to taxation to be −0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. Only a weak evidence of a difference for multinational companies is found.

Highlights

► We identify a direct effect of corporation tax on wages in a bargaining framework.

► We estimate this effect using data on 55,082 companies in 9 European countries.

► We estimate that a rise of $1 in tax would reduce wages directly by 49 cents.

► We find only weak evidence of a difference for multinational companies.

Keywords

Effective incidence Corporate tax

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