Paul L. Caron

Tuesday, September 13, 2022

Gale Presents Rethinking The Corporate Income Tax: The Role Of Rent Sharing Today At NYU

William Gale (Brookings Institution; Google Scholar) presents Rethinking the Corporate Income Tax: The Role of Rent Sharing (with Samuel Thorpe (Brookings Institution)) at NYU today as part of its Tax Policy and Public Finance Colloquium hosted by Daniel Shaviro:

William-galeStandard 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.

Our goal in this paper is to incorporate insights from the literature on rent sharing between firms and workers into analysis of the incidence and distributional effects of the corporate income tax. The essence of our argument is simple: excess returns account for a significant and rising share of the corporate tax base and firms tend to share excess returns with workers–predominantly but not completely with their high-income workers. Together, these facts imply that standard public finance analyses that allocate all the burden of taxes on excess returns to shareholders are inconsistent with important features of the real world.

Instead, the facts imply that–in addition to any burden workers face from the “indirect” effect on wages that occur through changes in macroeconomic aggregates such as capital per worker and output, as described in Harberger (1962) and a vast subsequent literature–workers (again, predominantly high-income workers) also bear some of the burden of the corporate income tax through a “direct” mechanism, holding the macroeconomic variables constant. This effect may occur via explicit bargaining, implicit bargaining (such as when more profitable firms pay their workers more), contractual details in executive contracts that link compensation to firm performance, self-dealing by executives, or other mechanisms. 

Our central results suggest both that more of the corporate income tax than previously understood falls on “labor,” but because rent sharing is concentrated among high-income workers, the corporate tax remains quite progressive in the most plausible models of rent sharing. ...

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