Thursday, January 31, 2008
Kevin Hassett (American Enterprise Institute) presents Taxes and Wages at NYU today as part of its Colloquium Series on Tax Policy and Public Finance. Here is the abstract:
Using panel data for 72 countries and 22 years, we explore the link between taxes and manufacturing wages. We find, controlling for macroeconomic variables that have been found in the literature to influence wages, statistically significant evidence that wage rates are not responsive to median or average income tax rates. We find that wages are significantly responsive to corporate taxation, and that the responsiveness of wages to corporate taxation is larger in smaller countries. We also find that tax and wage characteristics of neighboring countries, whether geographic or economic, have a significant effect on domestic wages. These results are consistent with the frequently employed assumptions in the public finance literature that capital is highly mobile, but labor is not. Under these conditions labor will bear the burden of labor taxes, and bear or share the burden of capital taxes.
For a discussion of Kevin's paper, see Jane G. Gravelle & Thomas L. Hungerford, Corporate Tax Reform: Issues for Congress (Congressional Research Service Report No. RL34229) (Oct. 31, 2007):
The analysis in this report suggests that many of the concerns expressed about the corporate tax are not supported by empirical data. Claims that behavioral responses could cause revenues to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis. Studies that purport to show a revenue maximizing corporate tax rate of 30% (a rate lower than the current statutory tax rate) contain econometric errors that lead to biased and inconsistent results; when those problems are corrected the results disappear. Cross-country studies to provide direct evidence showing that the burden of the corporate tax actually falls on labor yield unreasonable results and prove to suffer from econometric flaws that also lead to a disappearance of the results when corrected. Similarly, claims that high U.S. tax rates will create problems for the United States in a global economy suffer from a misrepresentation of the U.S. tax rate compared to other countries and are less important when capital is imperfectly mobile, as it appears to be.
While these new arguments appear to rely on questionable methods, the traditional concerns about the corporate tax appear valid. While an argument may be made that the tax is still needed as a backstop to individual tax collections, it does result in some economic distortions. These economic distortions, however, have declined substantially over time as corporate rates and shares of output have fallen. Moreover, it is difficult to lower the corporate tax without creating a way of sheltering individual income given the low rates of tax on dividends and capital gains.
A number of revenue-neutral changes are available that could reduce these distortions, allow for a lower corporate statutory tax rate, and lead to a more efficient corporate tax system. These changes include base broadening, reducing the benefits of debt finance through inflation indexing, and reducing the tax at the firm level offset by an increase at the individual level.