Tax Foundation: Guess Who Pays (For) Corporate Taxes?

The Tax Foundation has recently issued some compelling analyses of where the burden of corporate taxation in the U.S. falls. In one study, they’ve estimated that the average household burden from corporate taxes is $2,757, and they offer this critical observation in the press release:

…the United States’ top statutory corporate tax rate is the 2^nd highest in the industrialized world and is one of only two OECD countries to have not cut its rate since 1994.  Five countries cut their corporate income tax rates in 2006, seven more will have cut their rates by the end of this year, and Germany recently announced a planned cut on January 1, 2008.  U.S. lawmakers should consider enacting a substantially lower federal corporate income tax rate. Taking into account state-level corporate income tax rates (which don’t exist in most other nations), the cut would have to be at least 10 percentage points to get the U.S. rate down to the OECD average.

The following excerpts are from a related article on the study:

New research is indicating that in a global economy, where capital is highly mobile but workers are not, labor is bearing the brunt of corporate taxation. In a working paper for the Congressional Budget Office, William Randolph asserts that 70 percent of the burden of corporate taxes falls on domestic workers while the remaining 30 falls on shareholders.

Randolph’s 70/30 estimate parallels current estimates of the "factor incomes" of labor and capital in neo-classical growth models, which is intuitively appealing–if government extracts a certain amount of corporate income, the burden should be allocated in line with how the income itself is allocated. However, he argues that because capital is more internationally mobile than labor, labor actually bears a heavier share of the corporate tax than its share of income. His paper is a technical one, but a good read for econo-geeks: "International Burdens of the Corporate Income Tax" (pdf). His argument certainly lends support to the Tax Foundation’s case excertped below:

…low-income households bear a startlingly large share of the corporate tax burden…Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced…

…cutting the corporate income tax will benefit low-income wage earners far more than is generally expected…Despite the desire of many lawmakers and candidates to cut income taxes for lower- and middle-income taxpayers, most of these taxpayers have little or no income tax liability to reduce further. Therefore, these taxpayers would benefit much more from a cut in the corporate tax rate. Research has found that wages are very sensitive to corporate tax rates, so it is likely that these workers would see higher wages as a result of a cut in the corporate tax rate…

From an economic standpoint, these claims are reasonable. But they are certain to be controversial in the political realm. Courage and candor required, as always…