Working Paper Series 

Congressional Budget Office 

Washington, D.C. 

Corporate Tax Incidence: 

A Review of Empirical Estimates and Analysis 

Jennifer C. Gravelle (email: jennifer.gravelle@cbo.gov) 

Congressional Budget Office 

Washington, D.C. 

June 2011 

Working Paper 2011-01 

Working papers in this series are preliminary and are circulated to stimulate discussion and 

critical comment. These papers are not subject to CBO’s formal review and editing processes. 

The analysis and conclusions expressed in them are those of the authors and should not be 

interpreted as those of the Congressional Budget Office. References in publications should be 

cleared with the authors. Papers in this series can be obtained at www.cbo.gov (select 

Publications and then Working Papers). 
Abstract 

This paper reviews seven recent studies that have used empirical methods to examine the incidence of the 

corporate income tax. These regression-based studies follow three general approaches. The first group of 

studies uses the variation in corporate tax rates across countries to determine the effect of the tax on 

wages. A second group adopts the same approach, but uses the variation in corporate tax rates across U.S. 

states instead of focusing on cross-country differences. The third set of studies adopts wage bargaining 

models to analyze the effect of corporate taxes on wages. In some regards, the empirical approach offers 

advantages over the general equilibrium models usually used to analyze the incidence of the corporate 

tax, because the empirical studies are data driven and less rigid than the general equilibrium models. 

However, the empirical approach also has drawbacks: In order to fully account for the responses of labor 

and capital in general equilibrium, the reduced form regression analysis has to rely on aggregate data, 

which do not account adequately for the many factors that affect macro variables. In addition, each of the 

studies examined in this paper raises methodological concerns. As a consequence, the findings of the 

empirical studies seem inconsistent with observable data. General equilibrium models, which constrain 

results to the magnitudes of the economy, may be a more reliable source for specific estimates of the 

incidence of corporate tax than the empirical studies. 
1 

Introduction 

The incidence of the corporate income tax has been the focus of intense study since its 

introduction in 1909. Fifty years ago, many economists analyzed the incidence of the corporate tax by 

using emerging regression techniques, but their studies yielded contradictory results. With the publication 

of Arnold Harberger’s renowned study in 1962, general equilibrium models became the dominant method 

of analysis, and a consensus emerged that much of the burden of the corporate tax was borne by capital in 

a closed economy, in which none of economic sectors were involved in trade with other countries. As 

economies have become globalized, concern about whether that conclusion still holds within a large open 

economy has spurred new types of analysis. Some studies extend the general equilibrium models to an 

open economy setting.1

 With the release of at least seven empirical studies since 2007, there has also been 

a resurgence of the direct empirical approach to estimating the incidence of the corporate income tax. 

The empirical papers fall into three categories. Some studies have taken advantage of data from 

different countries to conduct cross-country studies; those studies use the variation in corporate tax rates 

across different economies to identify the effect of the corporate tax on wages. A second set of studies has 

taken a similar approach, but compares state corporate tax rates rather than corporate tax rates across 

countries. Studies in the third category use cross-country data, but base the analysis of the corporate tax 

incidence on a bargaining model that assumes that firms and workers negotiate wages. 

While none of the new empirical studies had been published in peer-reviewed journals at the time 

this review was written, most have been presented at research conferences. The appeal of the empirical 

approach is obvious. First, an empirical methodology appears to provide real evidence of the incidence of 

the corporate tax—data from different countries or states are used in an attempt to isolate the effect of the 

corporate tax on labor and capital. Second, compared with general equilibrium models, empirical studies 

are less “rigid—with actual data from the experiences of different countries and states, the empirical 

studies are not constrained by assumptions about the scope of the country’s economy or tax system. 

 

1

 See Jennifer Gravelle, Corporate Tax Incidence: A Review of General Equilibrium Estimates and Analysis, 

Working Paper 2010-03 (Congressional Budget Office May 2010) for a review of the corporate tax incidence 

estimates generated by open economy general equilibrium models. 
2 

Another advantage of empirical studies is the ability to make determinations regarding the statistical 

significance of the results. 

There are nevertheless disadvantages to relying on the empirical approach to study the incidence 

of the corporate tax. Empirical studies of the corporate income tax face challenges that are common to 

studies that rely on regression analysis; countries (and even states) may differ in fundamental – but 

unobservable – ways that affect workers’ wages, and if omitted from the analysis measures of incidence 

may be distorted. For example, it is difficult to control for other features of a country’s tax system that 

affect corporations and their workers; the reasons for changes in their corporate income tax rates may not 

always be observable. Focusing solely on changes in statutory tax rates would miss changes in other tax 

policy instruments that could offset the effect of the corporate tax rate change. There are also challenges 

that are unique to studies of the corporate income tax. In order to fully account for the responses of labor 

and capital in general equilibrium to changes in corporate income taxes, empirical studies must rely on 

aggregate measures of wages. However, the reliance on aggregate data increases the likelihood that many 

of the specific factors determining the wages for the country, or state, are omitted from the analysis.2

 

This paper examines the results from the new empirical approaches. It then compares the 

advantages and disadvantages of direct empirical analysis and general equilibrium modeling for 

determining the incidence of the current corporate income tax in a large open economy. 

Cross Country Studies 

 Three recent studies – by Hassett and Mathur (2007), Felix (2007), and Desai, Foley, and Hines 

(2007) – combine data from the United States with observations from different countries in order to 

estimate the effect of corporate income taxes on wages. Those studies look not only at differences across 

 

2

 Studies generally rely on measures of wages and not total compensation and thus may not measure fully the 

changes in total labor income. 
3 

countries but also over time – thus reflecting the reductions in corporate tax rates that have occurred in 

many countries since the mid-1980s. 

The three studies face challenges common to all investigations that use cross-sectional data. First, 

correlation does not imply causation. The studies discussed below find a significant and negative 

association between wages and top corporate tax rates across countries and generally conclude that 

increases in those rates cause wages to fall. The finding of a relationship, however, does not necessarily 

imply that wages are “responsive” to corporate tax rates. For example, countries with a low-wage labor 

force—and thus a small tax base from earnings—may rely more heavily on taxing large multinational 

corporations in order to raise necessary revenues. Under those circumstances, corporate taxes and wages 

would be negatively correlated, but corporate tax rates would increase in response to lower wages, not the 

reverse. 

A second concern is “omitted variable bias,” which occurs when a key explanatory variable is left 

out of the analysis. For example, cultures, traditions, and attitudes may vary significantly among 

countries, and those differences may help explain why some countries are more prone than others to rely 

on corporate taxes as a revenue source. Quantifying those differences, however, is challenging. Some of 

the studies use panel data, and they control for country- or state-specific fixed differences to address that 

problem. 

 Some methodological issues are specific to the study of incidence. First, some studies use 

individual or firm level data. However, tax incidence is determined at the economy-wide level. In 

response to taxes, labor and capital move towards a new equilibrium that determines the overall wage 

rates and returns to capital in the country. Variations in wages for individuals or firms do not reflect the 

impact of taxes on wages; rather those wage differentials reflect other factors in markets that are not 

perfectly competitive, such as local monopoly power. Second, some of the studies ignore the role of other 

countries’ tax systems. Theoretical studies of tax incidence suggest that in an open economy, the effects 

of a country’s taxes on wage rates and returns to capital also depend on other countries’ tax rates. For 

example, if the United States and a foreign country both have a 35 percent tax rate and the foreign country 
4 

cuts its tax rate to 25 percent, the foreign country would attract capital flows from the U.S. even though 

there was no change in the U.S. tax rate. Omitting changes in other countries’ tax rates from the analysis 

can bias the estimate of the home country's tax incidence because of those cross-country effects. 

Moreover, incidence can vary across countries depending on elasticities, country size, and the capital 

intensity of the traded sector relative to the capital intensity of the country as a whole.3

 

 

Hassett and Mathur (2006)

Hassett and Mathur estimate the effect of corporate taxes on wages in manufacturing industries 

using cross-country data. Their data cover the period from 1981 to 2005 and includes 65 countries. Their 

basic estimation equation is: 

ln   	 

 	 
 	 
 	 


where wa is the five year average of the hourly wage in manufacturing, t is the top statutory corporate tax 

rate, V is value added per worker, CPI is the consumer price index, and X represents a vector of other 

controls.4

 (The values of the independent variables are for the year at the beginning of the five-year period 

over which the average wage is calculated.) Hassett and Mathur convert the dependent variable from local 

currency to U.S. dollars using exchange rates and also include the CPI to control for the nominal values of 

the dependent variable. They control for other differences among countries and over time, including 

variables for such factors as level of schooling, degree of computerization, and extent of labor market 

regulations.5

 Dummy variables control for country fixed effects and time periods. 

Hassett and Mathur estimate elasticities of wages to top statutory corporate tax rate ranging 

between -0.3 to -1.Thus, a 1 percent increase in corporate tax rates is associated with between a 0.3 and 1 

percent decrease in wage rates. Those elasticity estimates drop to a range of -0.4 and -0.6 with alternative 

 

3

 See Gravelle (2010) for a discussion of the implications of these factors on estimates of corporate tax incidence. 

4

 Hassett and Mathur test different tax specifications, including the average effective and marginal effective 

corporate tax rates. 

5

 Hassett and Mathur note that they tried other specifications, such as including the level of schooling, but do not 

provide the results from all specifications. 
5 

measures of corporate tax rates (including the average effective corporate tax rate and the marginal 

effective corporate tax rate). 

As Gentry (2007) and Gravelle and Hungerford (2008) have noted, those findings show an 

exceptionally high elasticity and highlight one of the fundamental challenges of reduced form analysis—

the lack of constraint on the magnitude of elasticity estimates.6

 To understand how unlikely large 

responses like those would be in the United States, first consider the analysis from the perspective of a 

small open economy. A small open economy (with a small corporate income tax) is the most likely case 

where the general equilibrium model predicts that 100 percent of the corporate tax burden falls on labor. 

That is, the change in total wages equals the change in total taxes: 

Ldw = -rKdt 

where L is (fixed) labor input, dw is change the wage rate, K is the capital stock, r is the return to capital, 

and dt is the change in the tax rate. That equation can be converted to a form consistent with the elasticity 

measure used by Hassett and Mathur: 

dw/w = - (rKt/wL)*dt/t 

Hassett and Mathur find that a .01 percentage change in the tax (dt/t) yields a percentage change in the 

wage rate (dw/w) of between -0.003 and -0.01 percent, or a wage elasticity (e = - [(dw/w)/dt/t)]) of 

between 0.3 and 1. However, this implies that in the small open economy model, the ratio of corporate tax 

revenues to labor income (rKt/wL) would have to be between 0.3 and 1. In 2007, corporate tax revenues 

were about 2.7 percent of the U.S. gross domestic product (GDP), and labor income was about 57 percent 

of GDP.7

 That would imply that e equals 0.047—significantly smaller than their lower value of 0.3. Thus, 

even if the United States were a small open economy with a small corporate tax— the most likely 

 

6

 In those papers, Gentry (2007) and Gravelle and Hungerford (2008) review some of the recent empirical studies 

that are discussed in this paper. 

7

 The estimate of labor income is an underestimate because it does not include self-employment income. While 

some self-employment income may represent a return on capital, a portion is comparable to compensation for 

services and should be included in a measure of labor income. Thus, any estimates of the wage effects will be lowerbound estimates. More generally, the omission of self-employment income and non-cash compensation from labor 

income is a weakness of many of the empirical studies that have examined the incidence of the corporate income 

tax. 
6 

scenario to yield a large corporate income tax burden falling on labor, the magnitudes of aggregate 

income and revenue would not support Hassett and Mathur’s findings. Further, as general equilibrium 

models show, a larger open economy would not necessarily predict that 100 percent of the corporate 

income tax falls on labor. Because the United States is considered a large open economy, Hassett and 

Mathur’s results are even more unlikely. 

Another way to interpret their results is to look at the implications for the effect of a dollar 

increase in taxes on wages. Using their lowest estimate of 0.3 and the ratio of labor income to corporate 

tax revenues of 21.1, their results imply that a $1 increase in corporate taxes would decrease wages by 

$6.33. That result implies that an extraordinarily large share (over 630 percent) of the burden falls on 

labor.8

 

 Those types of anomalous findings are possibly an unintended consequence of the direct 

empirical approach used by Hassett and Mathur. Unlike general equilibrium models, which can be 

empirically calibrated to the economy being modeled, reduced form models are not constrained by actual 

features of the economy. Hassett and Mathur’s results would be consistent with a country in which the 

corporate tax revenue (rKt) was nearly the same share of GDP as total labor income. Even using their 

lowest estimate, corporate tax revenues would have to account for nearly a third of the share of GDP that 

is accounted for by labor income. Ultimately, the models may be picking up a spurious correlation over 

time and across countries. For example, in general, countries experiencing growth in wages and GDP may 

regularly cut corporate income taxes in response to favorable economic conditions. 

Hassett and Mathur’s results are also not robust to changes in the model specification. Gravelle 

and Hungerford replicate Hassett and Mathur’s study, and in the process, identified several statistical 

drawbacks with the analysis. One drawback is Hassett and Mathur’s use of exchange rates as an indicator 

of the relative buying power (and as the method for converting foreign wages into U.S. dollars). Those 

rates reflect the supply and demand for countries’ currencies, not necessarily the relative buying power of 

 

8

 The incidence estimate uses labor income as a share of GDP, but this share excludes self-employment income as 

well as indirect taxes and thus the incidence share is underestimated. 
7 

wages in the countries. Exchange rates can also be affected by other forces, such as the financial markets 

or government policies. After replicating Hassett and Mathur’s results, Gravelle and Hungerford test their 

robustness by using purchasing power parity (both in current and constant dollars), which measures the 

relative value of currency or what the currency can buy in different countries.9

 Those adjustments reduce 

both the significance and size of the estimates. In particular, for specifications using the effective average 

and marginal tax rates as measures of corporate tax rates, when measures of purchasing power parity are 

substituted for currency conversion, the resulting estimates are not statistically significant at conventional 

levels.10 

Felix (2007)

Felix takes a similar approach to that used by Hassett and Mathur, but presents additional 

estimates that include variables controlling for differences in education levels among countries. Felix 

estimates that a 10 percent increase in the corporate income tax would reduce gross wages by seven 

percent. As noted in the earlier discussion of Hassett and Mathur’s estimates, a value that large is 

inconsistent with corporate income taxes and labor income in the United States. When Felix controls for 

education, the estimated wage elasticity to the corporate income tax declines to about 0.4. While that 

result is at the lower end of the range of Hassett’s and Mathur’s estimates, it is still large based on the 

magnitudes of corporate income tax revenues and labor income in the United States. The results are not 

robust, varying with magnitude and significance depending on the specification. 

Felix's limited data set makes analysis difficult. While she obtained data for 19 countries covering 

the period between 1979 and to 2000, seven of those countries contain observations from only one or two 

 

9

 For example, an exchange rate based on purchasing power parity might be based on a comparison of how much the 

same item—say, a Big Mac—costs in two different countries. In contrast, standard exchange rates are determined by 

how many dollars another currency can purchase. 

10 Another concern was the lack of complete data. Gravelle and Hungerford test the sensitivity of an earlier version 

of Hassett and Mathur’s results to the method of averaging data for 5 years, by limiting the analysis to only those 

observations that had complete data for all five years. Elasticities decline as a result, and none of the new findings 

were significant. 
8 

years. Because there is only one year of data for a few of those countries, Felix is not able to control for 

fixed effects within countries to account for unobservable country characteristics. Additionally, only four 

countries (Belgium, Italy, Mexico, and the United States) have more than four years of data, and thus 

those countries dominate the observations. 

Desai, Foley, and Hines (2007)

While the two preceding studies use aggregate data for each country, Desai, Foley, and Hines 

take a different approach by relying on data for separate firms to estimate the incidence of the corporate 

income tax. Their panel data follow American multinational firms operating in more than 50 countries 

between 1989 and 2004.11 Their data set excludes observations from operations located in the United 

States. 

The authors estimate the effect of corporate taxes on wages. The variable for corporate taxes is 

the ratio of aggregate foreign income tax payments to the sum of aggregate net income and foreign 

income tax payments. The wage rate is measured as the ratio of total employee compensation, including 

benefits, to the number of employees. They employ several specifications including annual cross-section 

estimates and panel estimates that control for country fixed effects. 

Desai, Foley, and Hines derive estimates ranging between 45 and 75 percent of the burden of the 

corporate tax falling on labor. Their baseline case—which uses panel data and controls for country fixed 

effects —shows 57 percent of the burden falling on labor. Not controlling for country fixed effects 

increases the share of the burden falling on labor to 71 percent. Using annual cross-sectional data, the 

authors find that 69 percent of the burden fell on labor in 2004; that estimate drops to 49 percent when 

they do not control for the workforce’s education. They obtain similar results using cross-sectional data 

from 1989, 1994, and 1999. 

 

11 The panel set includes data from as many as 52 firms. Because some firms do not appear to have complete data 

for the entire time span, the number of observations varies, depending on the specification of the estimating 

equation. 
9 

The findings are consistent with estimates of the ratio of the corporate tax burden on labor 

derived from general equilibrium models of open economies calibrated to the U.S. economy. However, 

Desai, Foley, and Hines make an assumption that is not compatible with the analysis of tax incidence in 

the economy.12 They assume that prices of all goods remain fixed, but in an economy with a variety of 

firms and products, all prices of goods cannot be assumed to remain fixed—rather only one price can be 

deemed the numeraire. They argue that trade causes the prices of goods to be fixed and that all 

commodities have to sell at the same global price. However, our economy has numerous differentiated 

products and those products also differ from their foreign counterparts; thus, those diverse products can 

be sold at different prices. 

The price restriction in the analytic model forces the burden allocated to capital and labor to equal 

the total tax burden. As has been shown by open economy general equilibrium models (Gravelle and 

Smetters, 2006, and Randolph, 2006), the tax burden falling on capital and labor does not have to sum to 

the total tax burden at the economy-wide level. Some of the tax burden can be either exported or 

imported, so that more or less than 100 percent of the tax is borne by the domestic country. 

While that assumption is problematic at the economy-wide level, Desai, Foley, and Hines also 

apply the restriction at the firm level. Even though their observations are weighted averages of firms, 

those firms produce different products and assuming that each firm’s price does not change is inconsistent 

with the ability of individual firms to have different capital intensities. Randolph has demonstrated that if 

the restriction that the burden allocation must equal the total tax burden exactly is eliminated, the analysis 

does not yield any statistically significant results.13 More generally, the firm is not the appropriate unit of 

observation for assessing corporate tax incidence because changes in wages paid by a firm or the return 

on capital used by that firm would generally not equal the corporate taxes owed by the same firm. 

 

 

12 See Gravelle (2010) for a review of the corporate tax incidence estimates generated by open economy general 

equilibrium models. 

13 Bill Randolph made this argument in comments given at a conference at the American Enterprise Institute, March 

17, 2008. 
10 

Cross State Studies 

Recently, researchers have turned to data from individual states in the U.S. to estimate the 

incidence of the corporate income tax. Cross-state studies present many of the same challenges as crosscountry studies and also raise some unique concerns. First, and perhaps most importantly, states use 

apportionment formulas to determine the amount of a multi-state firm’s profits that were earned (and thus 

are taxable) in a given state. Apportionment formulas vary across states. One of the most common is a 

three factor formula that weighs the state’s shares of sales, payroll, and property equally. The double 

factor formula is a variation of the first formula, with sales weighted twice. A third formula is based 

solely on sales.14 Because of apportionment, it is very difficult to obtain an accurate measure of state 

corporate tax rates that can be used to estimate the incidence of that tax. 

Using states as the unit of observation adds another layer of complexity to the analysis because 

state tax rates and other state variables may not be independent. Instead, those state variables may reflect 

national factors resulting from tax competition, mobility of workers, and shared social norms. State 

corporate tax incidence may not yield useful insights into the incidence of the federal tax because of 

differences in state and national economic conditions. For example, labor and capital are probably more 

mobile across state lines than over national borders. Additionally, products are probably more 

substitutable across state lines than internationally. Furthermore, state corporate taxes are quite small 

compared with the federal tax, and they may be much less of a factor in determining wages at the national 

level and across states than other forces, such as the history and culture of the state, and the characteristics 

of its population, or the demands for goods and services provided by the state. While there are limits to 

the application of the findings from states to the federal corporate tax, those results may still provide some 

useful information about state policies. 

 

 

14 http://www.taxadmin.org/fta/rate/apport.pdf
11 

Felix (2009)

Felix (2009) uses data from the Current Population Survey (CPS), covering years 1977 to 2005, 

to estimate the tax incidence of state corporate tax rates. Her basic estimating equation is: 

ln 	

  	   



	 !

  

 	 "

The tax variable is the highest corporate statutory tax rate in the state, and the individual wage is 

calculated as annual salary divided by number of hours worked per year.15 Felix controls for differences 

among individuals by including variables for age, gender, race, and education level. She also includes a 

number of state characteristics including the marginal state income tax rate calculated for each individual 

using National Bureau of Economic Research’s TAXSIM model, the state sales tax rate, and controls for 

government services (although details on the measurement of that variable are not provided). However, 

she does not control for state fixed effects, even though the data set appears to contain sufficient 

observations to estimate that type of specification. 

Felix finds that the corporate income tax is significantly and negatively correlated with wages and 

concludes that a 1 percentage point increase in the state corporate income tax rate would decrease wages 

by between .14 and .36 percent. These results translate into a wage elasticity of -0.0094 to -.024 and 

imply quite large burdens on labor. State corporate income tax revenues in 2007 were about 0.38 percent 

of GDP, and labor income was about 57 percent of GDP, yielding a ratio of labor income to corporate tax 

revenues of 150; using that ratio and the range of elasticities, a $1.00 increase in the state corporate 

income tax rate would decrease average hourly wages by $1.41 to $3.60, suggesting not only that 100 

percent of the burden falls on labor, but also that up to 360 percent could fall on labor.16 

Felix also looks at these results over time by using averages of the data for five different 

historical periods: 1977-1981, 1982-1986, 1987-1991, 1997-2001, and 2002-2005. She finds that the 

 

15 To compute the number of hours worked in a year, Felix takes the product of two variables reported in the CPS: 

the number of hours usually worked per week and the number of weeks worked. 

16 These amounts are also understated, due to the exclusion of self-employed income in calculating labor income as 

a share of GDP, and to the exclusion of fringe benefits. 
12 

corporate income tax effect on wages appears to have initially decreased and then risen, with a drop in the 

most recent period. Felix’s findings in this study also contradict the results found in her paper with Hines 

(2009), discussed below. 

 Using the CPS presents certain challenges. One challenge is that individuals cannot be matched 

to the state in which they work but instead are matched to the state in which they live. For some large 

metropolitan areas, such as New York City or Washington, DC, residents may not necessarily work in the 

state in which they live and thus the corporate tax rates in their state of residence would not be applicable 

to the firms they work for. Thus ultimately, this paper is addressing the question of whether workers who 

reside in states with high or low corporate tax rates states earn high or low wages. A second drawback is 

that the CPS is not a panel data set; that is, it does not follow the same households over time. As a result, 

changes in wages across years may represent changes in the composition of the state’s population. The 

estimates based on those different populations could reflect changes in the movement of individuals 

across states and may thus be unrelated to state corporate taxes. 

Yet another challenge is the specification of the corporate income tax rate. Felix’s analysis uses 

the highest statutory corporate income tax rate in each state, but due to state tax apportionment that tax 

rate may differ from what firms actually pay in state taxes. For example, Louisiana has one of the highest 

top corporate income tax rates. However, a firm that employs workers residing in Louisiana but sells all 

of their goods in other states would not pay any corporate taxes in Louisiana because that state apportions 

income subject to corporate income tax solely on the basis of where sales occur. Under those 

circumstances, there probably is little relationship between the low wages of the Louisiana workers and 

the high corporate tax rates in their home state. 

 As noted above, Felix’s results are less extreme than some studies, but they still show very high 

correlation between high corporate income tax and lower wages. Given the ability for capital and products 

to move freely across states, there may be more ability for capital to escape the burden of the state 

corporate income tax. Similarly, mobile labor could also avoid the consequence of lower wages. 

However, it is uncertain that international mobility mirrors mobility across states. Thus the results of the 
13 

cross-state studies are probably not indicative of an overall measure of federal corporate income tax 

incidence. 

Carroll (2009)

Like Felix, Carroll (2009) uses data from the states to test the tax incidence of the state corporate 

tax. Whereas Felix relied on data for individuals to estimate the effect of the state corporate tax on wages, 

Carroll uses pooled cross sectional data from the Bureau of Labor Statistics at the state level from 1970 to 

2007 to better allow for general equilibrium effects. Carroll also relies on two different measures of the 

state corporate income tax rate: first, the top statutory rate (combining the federal and state corporate 

income tax rates) and second, an average corporate income tax rate (state corporate income tax collections 

divided by personal income). His measure of wages is average hourly earnings, which exclude the 

changes in employment levels that a measure of the wage bill would include. His basic estimation 

equation is: 

log  %&  '% (%
% %) 

  	 
 log


%& %(%
 
 
 	 ! log %(%
 %* 
 
 	

 log +% ,

 %
 ( %) 	 -%
%  

Carroll's analysis includes controls for the state share of population with at least a four-year 

college degree, the share of workforce that is unionized, the share of the population that is working age, 

and population density. His baseline specification also includes a five-year lag of the corporate income 

tax rates. 

 Carroll finds that a 1 percent increase in the statutory corporate income tax rate and in the average 

corporate income tax rate reduces production workers’ wages by 0.138 percent and 0.014 percent, 

respectively. Based on the latter result, he finds that a $1 increase in the tax revenue would decrease 

wages by $2.50. Both results are significant within standard confidence intervals. Varying some of the 

assumptions—allowing for different lengths of lagged tax rates and averaging wages over five years—has 
14 

small effects on the coefficient estimate and the significance of the statutory rate variable, but does not 

change the estimates on the average tax rate. 

Similar to Felix’s estimates, Carroll’s lowest elasticity estimate, which uses the average tax rate, 

suggests that a large share of the corporate tax burden (250 percent) would fall on labor. Again, while a 

standard closed economy model can result in 100 percent of the burden falling on labor, and depending on 

capital intensities it is theoretically possible for more than 100 percent of the burden to fall on labor in an 

open economy setting, such a large share is unprecedented among estimates from general equilibrium 

models. 17 

One concern with Carroll’s analysis is the measurement of the average corporate tax rate. As 

noted above, he computes the average tax rate as the ratio of corporate income tax collections to personal 

income in the state. Because the denominator of that variable includes wage income, the negative 

relationship Carroll finds could simply reflect an increase in the wages of production workers; that is, an 

increase in the wages of production workers would raise personal income in the state, all else equal. Even 

if corporate tax collections do not change at the same time, the “average tax rate” would fall due to the 

rise in the denominator. Ultimately, this measure of a tax rate is endogenous with the dependent variable 

and is not a true measure of the corporate income tax rate. 

Carroll’s analysis has other limitations. He attempts to address the issue of formula 

apportionment by relying on the average state corporate tax rate, which is intended to capture the effects 

of changes in the statutory rate as well as changes in the definition of the tax base due to formula 

apportionment as well as other factors. However, as noted above, the average state corporate tax rate is 

not a true measure of the average corporate income tax rate. Even if the average tax rate had been 

measured accurately, that rate could increase—for example, if corporate income collections increased 

because the state’s apportionment formula was changed to give greater weight to sales—without any 

change in the statutory corporate income tax rate. The statutory tax rate suffers from the same problems as 

 

17 Harberger (2006) estimated that 130 percent of the corporate tax was borne by labor in a model that assumed that 

the corporate sector was very capital intensive and was the sector that produced tradable goods. See Gravelle (2010) 

for a comparison of recent corporate tax burden estimates from general equilibrium models. 
15 

noted in Felix’s analysis—it does not accurately represent the tax rate the corporation faces after 

apportionment. The focus on the wages of production workers makes it difficult to capture general 

equilibrium effects, because those effects would also flow through to nonproduction workers and their 

wages. Lastly, although the use of aggregate state level data helps identify general equilibrium effects, 

isolating the factors that affect wages at such a high level of aggregation is extremely difficult. 

Bargaining Model Approaches 

Among the recent empirical studies on the incidence of the corporate income tax, two studies— 

Arulampalam, Devereux, and Maffini (2011) and Felix and Hines (2009)—have taken a decidedly 

different approach. Those studies adopt a bargaining model approach to determining tax incidence, 

assuming that bargaining between the firm and the employees determines wages. That approach suggests 

that corporate taxes could affect wages by a mechanism other than the general equilibrium forces on the 

supply and demand of labor and capital. 

There are some general limitations to relying on a bargaining model approach to determining tax 

incidence. Van Reenen (1996) observes that employees and employers rarely engage in direct bargaining 

over wages. Rather, bargaining may be more likely to occur between organized groups of unionized 

workers and their employers over contracts for a fixed period of time or covering total compensation and 

working conditions. 

If we expect that bargaining happens due to the presence of unions and not because individuals 

try to negotiate on their own, then the results from the bargaining models used by Arulampalam, 

Devereux, and Maffini and Felix and Hines have a limited application because relatively few U.S. 

workers belong to a union. In 2009, only about 12 percent of wage and salary workers belonged to a 

union. (That percentage increases to 13.7 percent if workers who are not affiliated with a union but whose 

jobs are covered by a union contract are included in the counts.) Moreover, union membership is much 

more prevalent among public service employees than among private sector workers: 37 percent of public 
16 

sector employees are members of a union, compared with 7 percent of private sector workers.18

Arulampalam, Devereux, and Maffini do not provide a mechanism in their analysis that would explain 

how an individual who may not belong to a union engages in bargaining with his or her employer. To the 

extent that Felix and Hines focus their empirical analysis on union labor, the analysis relates to a narrow 

section of the labor force. 

In addition, these approaches assume that a large share of firms are not competitive and thus earn 

excess profits or rents (profit over the normal required return) over which firms and workers bargain. 

While it is unlikely that all industries function in perfectly competitive markets, not all of those industries 

will necessarily generate continual levels of excess profits. For example, the volatile airline industry is not 

viewed as perfectly competitive, but its firms do not consistently maintain excess profits.19 Moreover, the 

application of the bargaining approach presumes that the excess profit firms must use organized labor and 

thus must bargain away the excess profits and taxes with unions. Given the low rates of union 

membership in private industry, it is hard to imagine that firms with excess profits necessarily rely on 

union labor. Firms that have excess profits and are not forced to share with labor may absorb the 

corporate income tax by reductions in the firm’s return to equity. 

Lastly, the analysis is not a general equilibrium analysis of the tax incidence, but a partial analysis 

of one method through which adjustments to a tax may be made. As the authors of these studies note, no 

attempt is made to account for the standard forces determining tax incidence—changes in the relative 

supply and demand of factors used in the taxed sector. Care must be taken not to infer an estimate of the 

long-run economy-wide tax incidence from the results of these studies. Even if we assume that all the 

firms that use union labor are those that also have excess profits, these workers still account for a very 

small portion of the labor force. Tax incidence is determined on a large market scale, not at the individual 

firm level. It is determined by changes in the supply and demand for capital and labor that affect the rates 

of returns and wages. Localized absorption of part of a tax via a reduction in the union premium on wages 

 

18 http://www.bls.gov/news.release/union2.nr0.htm

19 Borenstein and Rose (2007) provide an overview of airline industry and market structure. 
17 

cannot be expanded to general incidence on labor. Felix and Hines are more explicit about the limitations 

of their analysis, in that they admit that their results are limited to the tax incidence on union labor. In 

addition, however, their results do not fully measure the long-run incidence of the corporate tax on union 

wages because they do not account for potential shifts in the demand for union labor–for example, if firms 

replace union labor with non-union labor or substitute capital for labor. 

Arulampalam, Devereux, and Maffini (2011) 

Arulampalam, Devereux, and Maffini (2011) construct a model in which the wage rate, w, and 

the size of the labor force, N, are determined through bargaining between the firm and the workers in the 

company. The firm makes unilateral decisions regarding the size of the capital stock, K. Both workers and 

the firm have alternative opportunities: employees can quit and either take a new job or receive 

unemployment benefits, while firms can move the capital to another location. The wage rate, then, 

depends on the amounts that workers could earn outside the firm and that firms could earn at that 

location, as well as other locations. 

Generally, they find that the wage is a weighted average of the outside wage and a share of the 

after-tax profit per employee, excluding the amount that the firm could earn at another location. The 

equation is: 

  ./ 	 1 1 . 234, 6 1 1 1 *4

6 1 
7

11
6 1 8 911
6:

where w is the wage rate, μ is the bargaining power of the firm (and 1-μ is the bargaining power of labor), 

and / is the wage rate at other jobs (or unemployment benefits). The second term in the equation: 

;

,




 1 


 1 
<
18 

measures after-tax profit per employee, which is disaggregated into gross profit net of the tax on 

nondeductible capital expenditures, the effective tax per employee, and the firm’s potential profit at 

another location. Specifically, the first term in the brackets: 

(

,




 ) 

is the amount of profit (gross of wages) per employee, where K is the capital stock, N is the number of 

workers, m is the effective marginal tax rate, and r is the return on capital. The second term: 

 ( 


 

is the firm’s taxes per worker, where t equals the statutory corporate tax rate and is represents a 

collection of other factors that can affect a firm’s tax position, such as size of interest payments and the 

existence of losses and is divided by (1-t) to gross up the value to pre-tax amount. The last term: 

  


 

is the pre-tax value per worker that the firm could earn in some other endeavor. The equation above can 

be rewritten to define wages as the sum of the outside wage rate plus a share of excess profits: 

/ 	 1 1 . 234, 6 1 1 1 *4

6 1 / 1 
7

11
6 1 8 911
6:

In their empirical analysis, Arulampalam, Devereux, and Maffini deviate from this equation and 

instead estimate an equation in which wages are a function of taxes and the value added per employee. 

For this analysis, they use data from 55,082 companies located in nine European countries over the period 

1996 to 2005. Their basic estimation equation is: 

  = 	 > 	 ? 	 

where w is the annual average wages per employee calculated as the cost of employees divided by the 

total number of employees as the company level, VA is value added per employee, T is the per-employee 
19 

taxes as reported in the firm’s financial statement, and Z is a vector of other control variables associated 

with wage bargaining such as union density, and lags include lagged values of value added, taxes, and 

wages of up to two years. In one specification, they include an alternative wage, which they measure as 

the minimum wage per employee in the sector and country in a particular year. 

Under this specification, they find that a $1 increase in corporate income taxes reduces wages by 

49 cents in the long run. They also find that a $1 decline in value added has a smaller effect on wages 

than a $1 decline in corporate income taxes. However, this estimation equation does not reflect, 

specifically, the bargaining model presented, and despite including some control variables and lagged 

values of the key variables, the resulting estimation equation probably suffers from endogeneity. As 

shown in the derivation below, the endogeneity arises from the link between wages and the components 

that define value added, which include wages and taxes. 

Arulampalam, Devereux and Maffini’s first equation that defines profits: 

834, 6 1 6 1 4 1 > (1) 

Arulampalam, Devereux, and Maffini refer to F(K,N) as a revenue function and interpret F as the value 

added by workers. To simplify the relationship between wages, taxes, and value added, the cost of 

intermediate goods (INT) is added to this identity and PQ, the total revenue for the firm, is substituted for 

F(K,N). Additionally, they define r as the cost of capital, where r is defined as the sum of the after-tax 

return on capital (R) and depreciation (δ ). 

8  @ 1 6 1 A	4 1 
 1 > (1a) 

Consider the equation for T: 

>
B34, 6 1 6 1 4 1 CD (2) 

where t equals the corporate tax rate, α represents a measure of the generosity of depreciation allowances, 

and φ represents other features of the tax code that affect final tax liability, such as loss carry forwards, 

and interest payments. Without loss of generality, α could be applied to depreciation alone, and for 
20 

simplicity of exposition, φ can be dropped. Doing so and allowing for deduction of the cost of 

intermediate goods yields the equation: 

>
B@ 1 6 1 4 1 
D (2a) 

If α equaled 1, the firm’s tax liability would depend on the level of depreciation. If, instead, α

were greater than 1, its tax liability would decline due to more generous depreciation allowances, and the 

converse would be true if α were less than 1. When applied to the total cost of capital, α would need to 

equal δ/(R+δ), to be the same as economic depreciation. 

In the profit equation, the tax equation can replace T. If, for simplicity, α is assumed to equal 1, 

then: 



  @ 1 6 1 
 1 

4 1 4 (3) 

Rearranging yields: 

6  @ 1 
 1 A	4 1 8 1 



4 1 



8 (4) 

Value added is defined as revenue net of the cost of intermediate goods and investment. Investment 

equals the sum of the growth in new investment, g and the costs of replacement for depreciation, δ: 

=  @ 1 
 1 	4 (5) 

Substituting into the wage equation for revenue less intermediate goods yields, equation 4: 

6  = 1 A14 1 8 1 
 (6) 

where tax is defined as the sum of the two tax payments tR/(1-t)*K and t/(1-t)*π.

Consider again the authors’ estimation equation: 

  = 	 > 	 ? 	 

The equation is estimated per employee, so equation (6) is scaled down to a per-employee version. 

Equation (6) can be substituted for wages that were determined by the two identities defining profits and 

value added into the estimating equation: 

ln= 1 A14 1 8 1 
  

 	 
= 	 ? 	 =, 
,  (7) 
21 

Thus, the results do not provide evidence that the corporate income tax is shifted to workers. The 

authors note that by controlling for value added, they are able to isolate the direct effect of the tax on 

wages through bargaining. They also rely on the presence of other factors that determine taxes, , a key 

parameter of identification, to provide variability in taxes independent of valued added. However, that 

variability and the addition of other control variables and lagged variables may not be sufficient to 

override the inherent relationship between value added, wages, and taxes. The departures from the 

predicted measures above are likely due to omitted variables, the addition of lagged variables, and the 

instrumentation of the tax variable, all of which provide some departure from the link between value 

added, wages, and taxes. It is, therefore, not surprising that the results show value added per worker is 

strongly positively correlated with wages, and that tax payments are strongly negatively correlated with 

wages. 

 The estimation method does not include a measure of profits or of the excess profits that firms 

and workers are supposed to be bargaining over. Because the estimated elasticities are applied to the full 

amount of value added—rather than profits—to determine the bargaining distribution, the authors may be 

overestimating labor’s bargaining power. With its inclusion of lagged values, the estimation model also 

assumes some dynamic behavior, but as Gravelle and Hungerford point out, that is a departure from the 

authors’ original bargaining model. The dynamic features of the estimation model may have been 

intended to capture long-run incidence, but including only two-year lags may not be sufficient for 

consideration of a long-run effect and key variables (wages, for example) that should be allowed to adjust 

over the long run are kept fixed. 

The paper raises other estimation issues. First, the authors include the industry minimum wage as 

a proxy for labor’s alternative wage, but there is no reason to assume that the minimum wage is the 

opportunity wage for most workers or a measure of the marginal product of capital. A better measure 

might have been the average industry wages or the wages in non-union industries. Second, they also 

report their incidence estimates at medians, and as Gravelle and Hungerford show, estimating these at the 

mean, the common method for reporting regression estimates, greatly reduces the incidence estimate. 
22 

Third, estimating the equation in logarithmic form constrains their analysis in several ways. Using the 

logarithmic form, they are unable to include negative tax liabilities, implying theoretically that gains from 

the tax system are not bargained over. Additionally, the use of logarithms forces the elasticities to be 

constant. According to general equilibrium models of tax incidence, incidence elasticities should vary 

according to capital intensity of the industry. Beyond this, these firms are observed not only over different 

industries but different countries, so the assumption of a constant elasticity is restrictive. 

Felix and Hines (2009) 

Felix and Hines also apply a bargaining perspective to the study of corporate income tax 

incidence. They present a straightforward model of the union premium and use cross-state data to 

estimate the effect of corporate income taxes on that premium. If labor and firms bargain over their 

respective shares of excess profits, then corporate income taxes—by reducing total profits—should 

reduce the union wage premium. Their analysis is based on a sample of full-time private sector workers in 

2000, derived from the ongoing rotation group of the monthly Current Population Survey (CPS). That 

data set contains information on hourly wages, union status, and state of residence; the information on 

residence reveals variations in corporate tax rates across states. The final sample contained 57,426 

individual records. 

In their basic regression models, Felix and Hines control for employer industry, the worker’s 

occupation, employment by a nonprofit firm, and residence in a metropolitan area. The regressions also 

include several demographic characteristics such as age, marital status, years of education, and race. In 

subsequent specifications, they add dummy variables for the state of residence and the presence of rightto-work laws. They also make adjustments for state apportionment of the corporate tax. They use the 

highest marginal state corporate income tax rate adjusted for the deductibility of federal taxes. 
23 

Felix and Hines highlight two key findings from their analysis. First, union membership is 

correlated with higher wages. Second, a 1 percent increase in the state corporate tax rate is associated 

with roughly a 0.36 percent reduction in union wage premiums. 

In focusing on those findings, the authors overlook another important regression result. The 

reduction in the union wage premium occurs because non-union wages increase more than union wages; 

both union and nonunion wages appear to increase with higher corporate income taxes. Their measure of 

the union effect is also understated since they rely only on the interactive effects. Thus, they back out the 

union wage premium by effectively taking the difference between the coefficients on two interactive 

variables: the variable measuring interaction between union status and corporate income tax (with a 

coefficient of -1.18) and on the variable measuring interaction between union status, corporate income 

tax, and the ratio of labor to capital (LK) (with a coefficient of 4.22). Evaluating at the sample mean of 

the labor-to-capital ratio (0.194) yields the estimate that a 1 percent increase in the state corporate tax rate 

is associated with a decline of the union wage premium of 0.36 (1.18 – 4.22*0.194) percent. 

 To determine the effect of the corporate income tax on the union premium, the effects for 

nonunion and union wages are calculated separately below. The effect of a 1 percent higher corporate 

income tax causes nonunion wages to increase by 0.75 percent. For union wages, it is 0.75 - 1.18 + 

4.22*LK. Evaluating the labor-to-capital ratio at the mean for union workers yields an estimate of 0.19. 

(If this equation were evaluated at 0.194, the mean for all workers, the result would be 0.38 and the 

differential effect of corporate tax on union members in industries with average labor-to-capital ratios 

would be 0.36 (0.75 – 0.38), which is what the authors compute.) Following this approach, a 1 percent 

increase in the state corporate tax rate increased nonunion hourly wages by 0.75 percent (from $16.25 to 

$16.37) and union hourly wages by 0.187 percent (from $17.81 to $17.83). 

 While the wage differential, or union premium, has declined from $1.56 to $1.46, both union and 

nonunion wages have gone up, but union wages increased more slowly than nonunion wages. The authors 

also use the results concerning the fall in the wage premium to estimate that 54 percent of the tax is offset 
24 

from the fall in union wages. However, this estimate does not reconcile with the result that union wages 

increased. 

There are other limitations to their analysis that stem from the difficulties of relying on cross-state 

data. As with cross-country data, the effect on wages depends on the tax rates in both the workers’ state of 

residence and in other states; as with international comparisons, those effects should vary by the size of 

the state and other factors. Felix and Hines' main regression includes a number of controls for individual 

demographic characteristics, but they include fewer controls for state characteristics (the controls include 

the personal income tax rate and sales tax rate but no other factors that may be specific to the state). In an 

alternative specification, they control for state differences by including dummy variables for the states, 

but since they have only one year of data across all states they exclude the corporate income tax variable 

and rely instead on the corporate tax interaction terms. 

Their analysis is also based on the link between the union premium and corporate income taxes. 

Due to data limitations, Felix and Hines' results rely on corporate taxes linked to wages according to state 

of residence. As previously discussed, firms are not always located in the state where their workers reside. 

For most specifications, the authors also assume firms are located entirely within an individual state, 

which probably is not true for many large firms. In a few specifications, Felix and Hines assume all firms 

operate in multiple states, and they attempt to correct for state apportionment. In their correction, they 

subtract the share of sales tax from the state’s corporate income tax rate. However, that approach, for 

which the authors provide a detailed model for support, relies on an assumption that a firm’s operations 

are spread equally across states, which may not be appropriate because firms may have an incentive to 

arrange various activities in states depending on the rates and apportionment rules. It is not clear that their 

adjustment adequately corrects for state apportionment. 

As with cross-section studies in general, the problem of omitted variables arises, affecting the 

estimates of the effects of corporate taxes on both union and nonunion wages. Since both wages actually 

increased with corporate taxes, but nonunion wages rose by more, it may be that nonunion wages are 

more volatile than union wages. To the extent that unions are national, then each union would want to 
25 

push wages up to ensure that in any given state their union members are not treated unfairly relative to the 

same union members in other states. This effect should tend to equalize union wages across states, but 

would leave nonunion wages to the whim of the market. Finally, it is not clear why in this study, wages 

increased with corporate income taxes, whereas they decreased in Felix’s study that used state data. 

Comparison of Direct Empirical Methods with Empirically Calibrated CGE Models 

With the recent resurgence of reduced form empirical analysis, questions arise about what 

evidence to rely on for estimates of the corporate tax incidence. As discussed above, there are a number of 

limitations with the current direct empirical analysis. However, computable general equilibrium (CGE) 

models are not without their faults. This section discusses the relative merits and disadvantages of each 

approach. 

CGE Models

 There are three major benefits to using CGE models to measure corporate tax incidence. First, 

CGE models provide an understanding of the essential economic structure needed to identify incidence. 

These models must be calibrated for a number of underlying parameters, and well-estimated models use 

empirical values for substitution elasticities and capital intensities, internally restricting the incidence 

results to estimates that conform to the economy. Second, CGE models allow users to conduct sensitivity 

analysis when there is some uncertainty regarding the choice of assumptions, such as the openness of the 

economy and the mobility of capital and products. Although the models’ complexity makes it difficult, 

any results can be traced to the factors that are most influential and assessed for reasonableness. Lastly, 

by their very nature, the modeling approach provides perfect controls. Any other government policies or 

changes in taxes are perfectly accounted for. The model thereby removes the complicating factors and 

creates a vacuum within which the question of corporate tax incidence can be answered. Determining tax 
26 

incidence, particularly in our complex global economy, is complicated, and a clear structural economic 

model to track the effects of such a tax is extremely helpful. 

Of course, there are significant drawbacks as well. Most importantly, by their fundamental nature, 

CGE models force a rigidity on the results that may not adequately represent the economy. With open 

economies, this rigidity may be particularly problematic. Incorporating the many important aspects of the 

international economy adds complexity to the model. None of the current CGE models address all of 

those complicated aspects of a global economy. In fact, even the most extensive open-economy models 

assume one domestic economy and one foreign economy. To allow for multiple countries—or to account 

for other complexities of a global economy—would make it nearly impossible to extract or make sense of 

the results. Even with models that are still simple enough to be simulated, the model can easily become so 

dense that the results cannot be traced easily to the factors that explain them, and their reliability cannot 

be easily assessed. Additionally, a commonly noted fault of these models is that they must rely on 

assumptions of underlying parameters, raising concerns that the choice of assumptions reflects the beliefs 

of the analyst. Those concerns become greater when the analysis lacks any discussion of how realistic 

those assumptions are. Lastly, CGE models provide little way of getting a “confidence interval” around 

results. They require very knowledgeable analysts and significant research to determine if the results of a 

particular simulation are plausible. 

Even though these models produce varying results, as shown in Gravelle (2010), sensitivity 

analysis from those models and central estimates of the underlying parameters models can be combined to 

provide more “average” estimates of the corporate tax incidence. Gravelle (2010) also provides an 

alternative measure of corporate tax incidence that draws from the new view of property tax incidence. 

Under that alternative, a worldwide average corporate income tax is assumed to fall entirely on capital, 

and deviations from that average represent taxes on profits within each country. Ultimately, CGE models 

cannot be relied on alone; rather, direct empirical research should be used in combination with CGE 

models to test and validate the results and help better refine the underlying structure and parameters. 
27 

Direct empirical approach

 All of the direct empirical studies discussed above use reduced form regression techniques. Even 

those studies that begin with structural models, such as the studies based on bargaining models, ultimately 

rely on reduced form estimation. Those approaches may be viewed as providing more “real” evidence of 

the incidence of the corporate tax, and there are certainly benefits to relying more directly on data. 

Perhaps the most significant benefit of the direct empirical estimation is that this approach is not rigid. 

There is no need to restrict the analysis to one domestic country and one foreign country or to assume 

other countries have no corporate taxes. Essentially, that approach allows the data to speak for itself. This 

lack of rigidity also allows information to come from more than just the U.S. perspective. In some sense, 

the direct empirical approach could be viewed as trying to estimate an overall general incidence of the 

corporate tax without assuming countries differ in the way that incidence falls. Second, the direct 

empirical estimation allows analysts to measure the confidence range around the results. Any estimates 

can be looked at within a confidence interval. 

 There are, however, considerable drawbacks to the current empirical research. While the lack of 

rigidity may be an important benefit, it is also easily the most significant drawback. The results from 

cross-country studies of the corporate income tax incidence are extremely volatile and at times so large as 

to be improbable. As noted earlier, results from Hassett and Mathur and Felix could not possibly align 

with the U.S. economy. It was, in fact, this type of volatility that made an earlier generation of economists 

turn away from regression-based approaches and rely on the Harberger model. The direct approach is 

fraught with issues of omitted variable bias. It is difficult to control for any other policies the countries 

have and the reasons for changes in their corporate tax rates. The papers generally focus solely on 

changes in the statutory rate, but other changes to the corporate income tax base could offset that effect 

partially or even completely. For example, a country might adopt a revenue-neutral policy in which an 

increase in the corporate income tax rate is paired with the introduction of a tax credit; in combination, 

the two policies leave the effective tax rate unchanged, but the analysis of the empirical papers would 
28 

pick up only the increase in the statutory rate. Lastly, with all regression approaches, correlation is not 

synonymous with causality. 

 As noted earlier, tax incidence depends on all tax rates, including those of foreign countries. Both 

approaches do not directly account for the effect other countries’ tax rates have on the overall incidence 

of the corporate income tax. However, while the general equilibrium models do not expressly include 

other countries’ tax rates or changes in them, the results from modeling own-country rates can be used to 

glean information on the total tax incidence if other countries change their tax rates. Randolph (2006) 

conducted sensitivity estimates by country size, which can be used to determine the foreign tax incidence 

effect from countries of different sizes. Moreover, excluding other countries’ tax rates does not create 

errors within the general equilibrium approach since the own-country tax incidence is being measured 

effectively in a vacuum. Alternatively, the exclusion of other countries’ tax rates under the direct 

empirical approach not only prevents the determination of the full incidence but also creates errors in the 

estimates of own-country tax incidence. 

Similar to cross-country studies, cross-state studies are subject to all the limitations associated 

with cross-sectional empirical studies, plus some limitations that are unique to studies of state corporate 

income tax. State apportionments of corporate taxes and the inability to match individuals with the states 

in which they work confound the ability to adequately pair up corporate taxes with the demand for 

products and the use of labor. The use of state data to estimate the effect of the state corporate taxes on 

wages relies on the evidence provided from the impact of a small state corporate tax on a large aggregate 

variable. The omitted variable bias is a serious concern. Moreover, analysis of the state corporate taxes is 

not sufficient to make conclusions about federal corporate tax incidence because movements of products, 

capital, and labor between states can differ significantly from the international mobility of those factors. 

Adoption of a bargaining framework does not resolve many of those estimating issues—and in 

fact raises other concerns. Theoretically, that approach does not provide reliable estimates of tax 

incidence because of the narrow bargaining view that corporate income tax burdens are shared between 

firm and union labor and the disregard of the long-run general equilibrium. 
29 

 

Conclusion 

The direct empirical approach to estimating general tax incidence faces a fundamental challenge. 

To adequately allow for general equilibrium forces on the relative demands for capital and labor, 

corporate tax incidence analysis cannot be done at the individual or firm level because it is not the 

individual’s wage at the taxed firm, but rather the new equilibrium wages of the labor force and returns to 

capital in the economy that exhibit the burden of the corporate tax. However, analysis using state or 

country wages cannot adequately control for the determinants of wages at such an aggregate level or 

control for causes in the changes of corporate tax rates. 

 Even though the majority of the studies conclude that labor bears a substantial burden of the 

corporate tax, the various methodological limitations put the reliability of those specific estimates into 

question. Indeed, trying to address the long-run incidence of general corporate income tax is a daunting 

task, and these studies have made attempts at using the data available to provide insight into that question. 

However, it remains unclear where incidence will fall in an open economy. 

Direct empirical research would best aid the analysis of tax incidence to help inform the choice of 

parameters used in CGE models. The continuing use of direct empirical analysis of the corporate income 

tax would also be useful to further the development of empirical techniques and encourage the acquisition 

of enhanced data with which to test the validity of the estimates provided by CGE models. However, the 

current research has not provided clear answers to the general question of the allocation of the corporate 

income tax burden, and it remains extremely difficult to use aggregate information to determine a narrow 

and uncertain factor. In light of the volatile results from recent direct empirical analyses, more reliable 

estimates of the corporate income tax incidence may be derived by primarily relying on general 

equilibrium models that at least constrain the results in magnitude and provide a structural framework in 

which to understand tax incidence. 
30 

 
31 

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