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The Progressive Economics Forum

Corporate Taxes: The International Race to the Bottom

A nice commentary by Kristian Weis in the OECD Observer

Enjoy and share:


Comment from Stephen Gordon
Time: December 16, 2007, 12:23 pm

And a good thing, too (26-p pdf):

“Simple models of a small open economy yield strong results for the optimal taxation of capital located in that country. Given a world rate of return, a tax will raise the pre-tax rate of return, but leave the post-tax rate of return unaffected. The rise in the pre-tax rate of return is achieved by an outflow of capital which reduces labour productivity and hence the compensation received by the immobile domestic labour force. Although these effects may be moderated as the size of the economy rises, there is nevertheless a presumption that the burden of the tax will be shifted away from the owners of capital to the labour force.

We test this proposition directly using a large database of 23,000 companies in 10 countries over the period 1993 to 2003. We allow for the effects described above, and also consider the impact of taxes in a rent sharing framework where the workforce bargains with the company over the allocation of location-specific rent.

The results strongly support the hypothesis that source-based taxes on corporate income are passed on in the form of lower wages. We find sizable effects using two alternative models. The more moderate effects, found in both Model 1 and Model 2, suggest that just over half of an increase in tax liability would be passed on to the workforce in the short run. In the longer run, the fall in employee compensation would exceed the original increase in the tax liability.

Emphasis added. The people who pay corporate taxes aren’t the same ones as the people who sign the cheques that are sent to the Receiver-General.

Comment from Erin Weir
Time: December 18, 2007, 12:43 pm

The paper cited by Stephen seems to argue that, given international tax competition, workers suffer when capital leaves in pursuit of lower taxes. The commentary cited by Andrew argues that people would be better off with multilateral standards to prevent such tax competition. I fail to see the contradiction between these arguments.

Another contention in the paper cited by Stephen is that, where workers have sufficient bargaining power to translate higher after-tax profits into higher wages, lower corporate taxes imply higher wages. However, the vast majority of workers do not have such bargaining power. Also, other things being equal, lower corporate taxes imply higher taxes on labour income.

Finally, it is worth noting that this paper comes from an institution directly funded by Britain’s largest corporations.

Comment from Stephen Gordon
Time: December 18, 2007, 6:18 pm

You might want to reconsider that last sentence; the paper is just one of a long line of empirical and theoretical studies that all say the same thing.

Not everyone who makes this point is a bought-and-paid-for stooge.

Comment from Erin Weir
Time: December 18, 2007, 7:19 pm

I certainly agree that the paper’s arguments should be taken on their own merits. However, I also think that their source is worth noting.

Similarly, Canada’s leading advocate of corporate tax cuts, the C. D. Howe Institute, is governed and funded by corporations.

Comment from Stephen Gordon
Time: December 19, 2007, 3:59 pm

That sort of analysis degrades the level of debate, in much the same way that Marc Lee’s study on the tax structure was dismissed by many, simply because it was distributed by the CCPA.

Comment from Erin Weir
Time: December 19, 2007, 6:06 pm

But I’m not dismissing the paper simply because of the corporate funding. My original comment featured six sentences addressing the paper’s arguments and one final sentence noting the corporate funding.

Although I am most interested in engaging these arguments on their own merits, I do not apologize for observing that much of the research favouring corporate tax cuts is, in fact, funded by corporations.

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