[lbo-talk] Kerry's Tax Cut Makes Me Wanna Ralph

dks dkslbo at yahoo.com
Fri Apr 2 10:45:57 PST 2004


Max writes:

"This points up minority status of the consumer burden outcome, as opposed to the burden being shared by labor and capital. I'll retreat to the position that there is a dearth of research showing the tax is borne by consumers."

I agree with this. In some sectors, consumers will gain and in others they will lose; I think the overall effect on them is insignificant. But I think figuring out how the burden is divided between capital and labor is important for distributional reasons; if, as the theory suggests, the tax is born mostly by labor, then it's obviously regressive. And if my memory is correct, CIT revenues make up about 10% of total tax revenues in the US, so it's meaningful.

Are you aware of any empirical studies of the corporate tax incidence on capital and labor? Your post yesterday implied that you were, and I did a cursory search this morning and didn't come up with anything. I'm more familiar with the theoretical work on this, and (supiciously) no one there talks about any empirical results. All the empirical work I've run across on CIT has focused on its efficiency and possible distortions; its incidence was an afterthought. I can understand why an economy-wide study of this would be difficult (both because the data you'd need doesn't really exist and also because the CIT is small compared to many other factors and thus hard to disentangle), but it seems like a study of a particular industry would be feasible and much more manageable. A sociological study of the reaction of corporate leadership to changes in the CIT could also be enlightening (since, as someone else suggested, it's puzzling that corporations lobby to avoid the CIT if they really can pass all of the cost along to labor).

Max again: "If you think the tax makes capital run away, leaving the burden on workers, I think you have to ask why there is any capital here to begin with, in light of lower taxation and much lower costs of labor elsewhere. If taxes loom too small in business costs of operating in alternative locations, then as far as taxes are concerned, capital is immobile and bears the CIT."

This is true for a small economy, but the US is so large relative to world capital markets that a fall in the rate of return to capital there (caused by an increase in corporate taxation) will pull down the rate of return worldwide, so there can be a decrease in US wages without much capital flight. Harberger's '95 paper actually suggests that much of this could be offset by gains to consumers, but that finding isn't as robust to changes in assumptions as is the basic result that labor bears a much higher burden than capital.

As is often the case, though, at times the theory starts to bear little resemblance to reality, which is why I'd love to see some empirical work on this question. Oh, and for the curious, I found the Harberger 1995 paper buried on his website. It's pretty readable, explaining his model in as clear terms as possible without resorting to the math: <http://www.econ.ucla.edu/harberger/abc.pdf>

Finally, with respect to the possiblity of reducing or eliminating the CIT in order to help labor, Harberger makes the important point that because of general equilibrium issues, this will only work if the rest of the world does not follow suit. In other words, the effects of changes in the CIT can only be predicted if we *also* know what all the other big countries are going to do.

Cheers, Dan



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