William G. Gale (Brookings Institution; Google Scholar) & Samuel I. Thorpe (Brookings Institution), Rethinking the Incidence of the Corporate Income Tax:
Debates about corporate income tax cuts follow a familiar script. Republicans claim that rank-and-file workers benefit. Democrats argue that affluent shareholders reap the gains.
In a new project [Rethinking the Corporate Income Tax: The Role of Rent Sharing], we find that, workers do benefit, but it is the most affluent employees — managers and executives — who receive the lion’s share of benefits, not rank-and-file staff.
Let’s back up, though. Loosely speaking, corporations are taxed on their net profits. These consist of normal returns—the amount one could expect from a standard market investment—plus excess returns earned from patents, special expertise or some combination of skills, luck, economies of scale, location-specific factors, or market power in products or labor.
Studies suggest that 60 percent or more of the corporate income tax base consists of these excess returns. The TPC model, for example, assumes that normal returns constitute 40 percent of the corporate tax base while excess returns account for the remaining 60 percent.
Who bears the tax on these excess returns? Standard thinking concludes that any tax of less than 100 percent on excess returns still leaves the firm with some excess returns and thus might not affect investment or hiring at all, in which case shareholders are left holding the bag.
There is substantial empirical evidence, however, that firms share their excess returns with their employees. In the old days, this occurred via union strength, but unions and rank-and-file workers have lost bargaining power over the last 60 years.
William G. Gale & Samuel I. Thorpe, Rethinking the Corporate Income Tax: The Role of Rent Sharing:
Standard analysis of the corporate income tax assumes shareholders bear the burden of taxes on excess returns. But evidence shows that firms share rents with workers, especially high-income workers, which implies that these workers bear some of the burden as well. Using the Tax Policy Center microsimulation model, we show that, relative to standard assumptions, allowing for rent sharing with high-income workers consistent with recent studies changes the incidence of the tax—labor bears more of the burden—but the tax remains highly progressive. We discuss several implications of the results and directions for future research.