Which Workers Bear the Burden of Corporate Taxation and Which Firms Can Pass It On? Micro Evidence from Germany.

The question of who bears the burden of the corporate income tax is important. In the tax policy debate, this issue is controversial. Proponents of higher taxes on business argue that these taxes mostly fall on firm owners and thus redistribute income from ‘rich to poor’. Critics object that higher taxes on profits will not be borne by capital because capital is internationally mobile. According to this view, the burden of higher corporate taxes will be shifted to immobile factors of production, in particular labour. In economic research, the question of who bears the corporate tax burden has been discussed intensively in the context of theoretical models, but empirical work on this issue is scarce. In this paper we provide empirical evidence on the wage incidence of the German business tax, which is set at the municipal level. For our analysis, we use a very rich administrative linked employer-employee panel, covering 11 years, and link it to data on the business tax rates of about 11,500 German municipalities. On average 8% of the municipalities adjust their business tax rate per year. We are able to exploit multiple quasi-natural experiments to identify the tax incidence on wages. The detailed administrative data allow us to estimate heterogenous incidence effects and to explore different channels of how the business tax burden is passed on. Our central estimate of the long-run wage elasticity with respect to the effective corporate tax rate is -0.18. We find that it takes up to two years until the corporate tax burden is (partly) shifted to labour. Our results further suggest that the burden is largely borne by incumbent workers. Worker groups that are more vulnerable, such as low-skilled workers, women, part-timers and individuals with low firm specific tenure share a relatively higher burden of the corporate tax. As far as firm heterogeneity is concerned, we find significant industry difference in the business tax incidence on wages. Following economic intuition, we find that firms shift a larger share of tax burden to their workers if the wage bargaining takes place at the firm level rather than at the sectoral level and if the collective agreement is not binding, i.e. wages exceed the minimum wage stipulated in the agreement. Moreover, more profitable firms seem to shift less of the burden.