International Tax Policy Forum
INTERNATIONAL TAX POLICY FORUM/
THE URBAN-BROOKINGS TAX POLICY CENTER
SEMINAR
Who Pays the Corporate Tax in an Open Economy?
December 18, 2007
WWW.TAXPOLICYCENTER.ORG
www.itpf.org
International Tax Policy Forum
INTERNATIONAL TAX POLICY FORUM / URBAN-BROOKINGS TAX POLICY CENTER SEMINAR
Who Pays the Corporate Tax in an Open Economy?
Tuesday, December 18, 2007
Table of Contents
I. Agenda …………………………………………………………………………… 3
II. About the International Tax Policy Forum ……………………………………… 4
III. About the Tax Policy Center ……………………………………………………. 5
IV. Alan J. Auerbach, "Who Bears the Corporate Tax? A Review of What we Know" (September 2005)…………..…………………………………………................. 6
V. Alan J. Auerbach, "Who Bears the Corporate Tax Burden?" (December 18, 2007) [Presentation] …………………………………………… 32
VI. Alan D. Viard, "How Does the U.S. Government Distribute Corporate Tax Burdens?" [Presentation] ……….………………………………………………. 44
VII. Mihir A. Desai, C. Fritz Foley, James R. Hines, Jr., "Labor and Capital Shares of the Corporate Tax Burden: International Evidence" (December 2007)……… 51
VIII. Kevin A. Hassett and Aparna Mathur, "Taxes and Wages" (March 6, 2006) …... 78
IX. William C. Randolph, "International Burdens of the Corporate Income Tax", Working Paper Series, Congressional Budget Office (August 2006)…………… 103
X. Biographies of Participants …………………………………………………….. 138
.
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International Tax Policy Forum and Urban-Brookings Tax Policy Center
Who Pays the Corporate Tax in an Open Economy? With a Keynote Address by former U.S. Treasury Secretary, Lawrence Summers
Date: Tuesday, December 18, 2007, 8:30 a.m.–1:30 p.m. Location: Urban Institute, 2100 M St., NW, Washington, DC (entrance on 21st Street) 5th Floor, Katharine Graham Conference Center
This conference considers the distribution of corporate tax burdens in open economies. It is well understood that high corporate taxes may be borne by capital owners in the form of lower after-tax profits, by consumers in the form of higher prices, or by workers in the form of reduced wages. Expanding international trade and investment may change the effects of corporate taxation, with implications for the distribution of the U.S. corporate tax burden.
8:15 a.m. Registration 8:50 a.m. Introductory Remarks John Samuels (GE) and Bill Gale (Brookings) 9:00 a.m. What do we know about who bears the corporate tax burden?
Moderator: James Hines (Michigan) Presenter: Alan Auerbach (UC-Berkeley)
9:45 am How does the U.S. government distribute corporate tax burdens? Moderator: Alan Auerbach (UC-Berkeley)
Presenter: Alan Viard (AEI) 10:15 am Evidence of the impact of corporate taxation on wages and profits Moderator: Glenn Hubbard (Columbia)
Presenters: Mihir Desai (Harvard) and Fritz Foley (Harvard) Discussant Kevin Hassett (AEI)
11:00-11:15 Break 11:15 am Is it time to change the way the U.S. government distributes corporate tax burdens? Moderator: Michael Graetz (Yale)
Presenters: Robert Carroll (U.S. Treasury), Eric Toder (Urban Institute), James Hines (Michigan) and William Randolph (CBO)
Noon Luncheon 12:30 pm Keynote Address: Lawrence Summers (Harvard) 1:15 pm Adjourn
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International Tax Policy Forum
About the International Tax Policy Forum Web site: www.itpf.org Member Companies Alcoa, Inc. Agilent Technologies, Inc. Altria Group, Inc. Amgen, Inc. Bank of America Caterpillar Inc. Citigroup Delphi Corporation EDS Eli Lilly and Company Emerson Electric Co. Exxon Mobil Corporation Ford Motor Company General Electric Co. IBM Corporation ITT Industries, Inc. Intel Corp. Johnson & Johnson Mars, Incorporated McDonald’s Merrill Lynch Microsoft Corporation Morgan Stanley Group Inc. PepsiCo, Inc. The Coca-Cola Company The Procter & Gamble Company The Prudential Insurance Company Time Warner Inc. Tupperware Corporation United Technologies Corporation Wal-Mart Stores, Inc. Wyeth John M. Samuels, Chairman Board of Academic Advisors
Founded in 1992, the International Tax Policy Forum is an independent group of 31 major U.S. multinationals with a diverse industry representation. The Forum’s mission is to promote research and education on the taxation of multinational companies. Although the Forum is not a lobbying organization, it has testified before the Congressional tax-writing committees on the effects of various tax proposals on U.S. competitiveness. The ITPF also briefs Congressional staff periodically and sponsors public seminars on major international tax policy issues. Most recently, in December 2006, the ITPF co-sponsored a conference on “Tax Havens and Foreign Direct Investment” with the American Enterprise Institute.
On the research front, the Forum has commissioned over 20 papers on international tax policy topics such as the effects of the interest allocation rules on the competitiveness of U.S. firms, the compliance costs of taxing foreign source income, and differences in effective tax rates faced by U.S. domestics and U.S. multinationals (see www.ITPF.org). Members of the Forum meet three times a year in Washington, DC to discuss key international tax policy issues with leading experts in government, academia, and private practice. PricewaterhouseCoopers LLP serves as staff to the Forum. John Samuels, Vice President and Senior Counsel for Tax Policy and Planning with General Electric Company, chairs the Forum. The ITPF’s Board of Academic Advisors is chaired by Prof. Glenn Hubbard (Columbia University) and includes Prof. James Hines (University of Michigan) who also directs the ITPF research program, Prof. Michael Graetz (Yale), Prof. Alan Auerbach (University of California, Berkeley), Prof. Mihir Desai (Harvard) and Prof. Matthew Slaughter (Dartmouth).
Glenn Hubbard, Chairman James R. Hines, Jr., Research Director Alan J. Auerbach Mihir A. Desai Michael J. Graetz Matthew J. Slaughter Consultants Lindy Paull Bernard M. (Bob) Shapiro Bill Archer Peter R. Merrill
ITPF Mission Statement The primary purpose of the Forum is to promote research and education on U.S. taxation of income from cross-border investment. To this end, the Forum sponsors research and conferences on international tax issues and meets periodically with academic and government experts. The Forum does not take positions on specific legislative proposals.
1301 K Street, NW 800W Washington, DC 20005 202/414-1666 202/414-1301 FAX
Page 4
About the Tax Policy Center TPC Quick Facts
TPC scholars have testified before Congress 56 times since 2002
More than 2,000 news articles and editorials have cited TPC since 2002
TPC has produced more than 1,000 distribution and revenue tables
The TPC web site has an average of 5,310 visitors a day, or one visitor every 16
Advisory Board
Jodie Allen, Pew Research Center Robert Greenstein, Center on Budget and Policy Priorities Ronald A. Pearlman, Georgetown University Law Center Jean Ross, California Budget Project Leslie B. Samuels, Cleary, Gottlieb, Steen, and Hamilton Joel Slemrod, University of Michigan Jonathan Talisman, Capitol Tax Partners, LLP
State Advisory Board
David Brunori, George Washington University Robert Ebel, District of Columbia Office of Revenue Analysis William Fox, University of Tennessee Iris Lav, Center on Budget and Policy Priorities Therese McGuire, Northwestern University Jean Ross, California Budget Project
The Tax Policy Center (TPC), a joint venture of the Urban Institute and the Brookings Institution, opened its doors in April 2002 with the goal of improving tax policy and, ultimately, Americans’ quality of life and economic security. To that end, TPC provides objective, timely, and accessible information to help policymakers, journalists, interested laypeople, and academics identify and evaluate current and emerging tax policy options. Our work reflects the belief that better information, rigorous analysis, and fresh ideas injected at key points in the policy debate can forestall bad policies and reinforce good ones. The Center combines top national experts in tax, expenditure, and budget policy, and microsimulation modeling to concentrate on four overarching areas critical to future debate: Fair, simple, and efficient taxation: Virtually everyone agrees that taxes should be simple, fair, and efficient. Disagreement arises over how to define and achieve those objectives. TPC quantifies trade-offs among these goals and searches for reforms that increase simplicity, equity, and efficiency. Social policy in the tax code: Over the past decade, much of social policy has shifted from direct expenditures to tax subsidies. A full assessment of this shift as well as tax progressivity, marriage penalties, and related issues requires consideration of both tax and spending programs. TPC is evaluating this revolution in tax and social policy. Long-term implications of tax and budget choices: Long-term projections paint a constrained picture of the nation’s fiscal prospects because of unfunded public obligations related to rising health care costs and the retirement of the baby boomer generation. TPC examines the implications of current policies and proposed tax changes for future generations. State tax issues: State and local taxes play important roles in assisting low- and moderate-income families, attracting business development, and affecting the cyclical properties of the economy, and they serve as a laboratory for different approaches to resolving tax and fiscal issues. TPC builds on lengthy traditions at the Urban Institute and the Brookings Institution in examining state issues. TPC communicates its research on our popular website, www.taxpolicycenter.org, which Forbes named one of the top five sites in the tax field, and through an electronic newsletter that reaches more than 3,000 subscribers with information on TPC events and publications. In October 2007, the Center initiated a tax and budget policy blog called TaxVox, www.taxvox.org, to better communicate TPC research and analysis and encourage discussion of key issues in the tax policy debate.
Urban Institute 2100 M Street, NW Washington, DC 20037 202-833-7200 Brookings Institution 1775 Massachusetts Ave., NW Washington, DC 20036 202-797-6000
Page 5
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Page 31
1
Who Bears the Corporate Tax Burden?
Alan J. AuerbachDecember 18, 2007
Outline
• The US Corporate Tax• Old (Naïve?) Theory of Incidence• The Harberger Model• Beyond the Harberger Model
Page 32
2
Trends in U.S. Federal Corporate Income Tax Revenue
0
1
2
3
4
5
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Fiscal Year
Perc
ent o
f GD
P
0
5
10
15
20
25
Perc
ent o
f Rev
enuePercent of Revenue
Percent of GDP
Trends in U.S. Federal Corporate Income Tax Revenue
0
1
2
3
4
5
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Fiscal Year
Perc
ent o
f GD
P
0
5
10
15
20
25Pe
rcen
t of R
even
uePercent of Revenue
Percent of GDP
Page 33
3
S Corporation Share of Net US Corporate Income
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Year
Shar
e of
Net
Inco
me
Share of All Corporate Income
Share of Nonfinancial Corporate Income
• Simplest theory: a burden on corporations• Simplest coherent theory: a burden on shareholders,
since it is really their income that is being taxed• Even this approach complicated by importance of tax-
exempt shareholders; would require further allocation– DC plans: workers– DB plans: firms (liability)? workers? (bargaining); all
taxpayers? (PBGC)– Nonprofit institutions: donors? beneficiaries?
• Maybe not as progressive as in past
Who Bears the Tax Burden?
Page 34
4
The Harberger Model
• Investment will shift out of the corporate sector, leading to an equalization of after-tax returns on all investment– Owners of corporate capital bear only a share of the burden– But owners of all capital bear (roughly) the total burden
• Not as progressive as under shareholder incidence, but still progressive
• In introducing the possibility of behavioral responses, raises the issue of behavioral distortions– Burden > Revenue
What’s Missing?
• Dynamics• Investment Provisions• Corporate Financial Policy• Imperfect Competition• Saving
Page 35
5
What’s Missing?
• Dynamics• Investment Provisions• Corporate Financial Policy• Imperfect Competition• Saving• International Context
Dynamics
• Even if Harberger’s is the right long-run approach, adjustment takes time– the corporate tax (or changes in the corporate tax)
should fall on corporate capital in the short run, gradually shifting to all capital in the long run
– But the incidence of the tax would have different timing than this suggests, because of capitalization
– all of the differential should be reflected in current asset values and hence borne by current shareholders
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6
Investment Provisions
• With investment incentives (example: bonus depreciation) and historic cost depreciation, old and new capital have different tax attributes; new capital is favored
• Again, this extra tax on old capital should be reflected by capitalization, with the capitalized differential borne by shareholders
Corporate Financial Policy
• With debt and the interest deduction, does capital bear any burden?
• Stiglitz (1973), Miller (1977): corporate tax is voluntary, since can always use debt
• So, shareholders may bear tax, but netincidence of corporate tax may be negative: burdens of other taxes would be higher if option removed
• Changes in corporate tax fall on those who benefit, i.e., shareholders
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7
Imperfect Competition
• Krzyzaniak and Musgrave (1963): corporate tax “over-shifted” – after-tax returns increase
• Over-shifting indicates the presence of imperfect competition
• With imperfect competition, there are noncompetitive rents being taxed
• If rents fixed, another component of the tax shareholders can’t shift. True for monopoly, but not necessarily for other modes of imperfect competition
Implications Thus Far
• For several different reasons, part of the corporate tax is likely to be borne by shareholders
• Because of capitalization of future taxes, incidence analysis has a second dimension –not just what income class, but also which generation
Page 38
8
Saving
• So far, various channels through which a portion of the corporate tax will be borne by shareholders
• With capital stock fixed, the balance will still be borne by all capital via a lower rate of return, following Harberger’s logic
• If lower rates of return reduce saving, then part of the burden will be shifted to other factors of production, primarily labor
• But evidence weak on saving responsiveness
International Context
• In an open economy, another mechanism for an incipient decline in rates of return to reduce the domestic capital stock – capital flows
• But in the international context, further issues also arise– Tax systems at home and abroad (territorial,
worldwide, or mess)– Responses include not just location of capital, but
also location of corporate residence and profits
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International Context
• Simplest situation: a world of source-based taxation
• By driving capital out, the part of the corporate tax that would otherwise fall on capital is at least partially shifted to domestic labor by capital outflows
• How much of this shift depends on how small a country and how well capital, goods and services flow
International Context
• First complication: with transfer pricing, profits can flow even if capital doesn’t
• This may not be bad for labor (the capital is still in place), but it is bad for revenue
• If we include the cost of distortions, burden goes down by less than revenue, and still likely to be shifted
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International Context
• Second complication: with “lumpy”investment decisions (location, not just scale), the statutory tax rate may gain in importance relative to provisions aimed at investment– some rents may be internationally mobile
International Context
• Both complications – transfer pricing and shifting of rents – increase share of burden on domestic factors associated with an increase in statutory corporate tax rate
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11
International Context
• Third complication: what about world-wide taxation?
• If done “right” by US – no taxation at source, full immediate taxation of US earnings at home and abroad – then corporate tax won’t influence capital flows by discouraging investment in US vs. elsewhere; but…
International Context
• Even in this case, corporate residence choice would be distorted, so shifting possible
• We don’t tax worldwide profits as accrued• We tax at source• All this makes the impact of actual US system
hard to analyze, but likely closer to a source-based tax than a residence-based one
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Summing Up
• The corporate tax isn’t borne by corporations• Part of the corporate tax is borne by
shareholders – but we should pay attention to which part and which shareholders
• The rest of the corporate tax would fall on capital, but saving and especially international capital flows shift some of this to labor and other domestic factors (e.g., land)
Summing Up
• Incidence depends on the structure of taxation– Simple measures like revenues or effective tax
rates insufficient for assessment• Burden > tax revenue• Openness of the economy influences the
relative impact of different provisions (e.g., tax rate vs. tax base) and makes new issues (e.g., source vs. residence, expense allocation rules, etc.) relevant
Page 43
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How does the U.S. government distribute corporate tax burdens?
Alan D. ViardAmerican Enterprise Institute
December 18, 2007
Complex issues indistributional analysis
• Income classifier• Tax payments v. tax burdens• Phase-ins, sunsets• Timing provisions• Key issue: Short-run v. long-run incidence
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2
Distributional analysisof corporate income tax
• Few analyses released recently– CBO annual effective-rate study
• Few big recent corporate tax changes• Waning interest in distributional analysis
by policymakers– Particularly, for corporate tax
Congressional Budget Office
• Oct. 1987, July 1988: Two alternatives, all to capital and all to labor– Allocating to (any) individuals viewed as new
• Feb. 1990: Half to capital, half to labor– Policymakers prefer single allocation
• Jan. 1994 and thereafter: All to capital– Based on assessment of literature
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3
CBO measure of capital income
• Interest, dividends• Realized capital gains (scaled by
economy-wide realizations)• NOT income from pass-thru firms• No allocation to tax-sheltered accounts,
tax-exempt organizations
Treasury
• Longstanding allocation to capital• But, 1992 integration study included half-
capital, half-labor alternative
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4
Treasury measureof capital income
• Interest, dividends• Realized capital gains• Income from pass-thru firms IF exempt
from payroll, self-employment tax• Distributions from tax-sheltered accounts• No allocation to tax-exempt organizations
Joint Committee on Taxation
• 1993 Red Book: All to corporate capital– Disclosure: Participated in writing
• Many ambitious recommendations, followed for about a year
• JCT stopped allocating corporate tax due to uncertainty
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5
Council of Economic Advisers
• 2004 ERP chapters– Disclosure: Participated in writing
• Recommended long-run tables allocating part of burden to labor– Supplement, not replace, short-run tables
Other taxes disguisedas corporate taxes
• Disguised payroll taxes, subsidies– Red Book, p. 49 n.65; 2004 ERP, p. 108
• Disguised excise taxes, subsidies– Fullerton, Gillete, Mackey (1987); Gravelle
(JEL, 1992)• In practice, rarely treated separately
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6
Investment incentives
• Apply only to new capital• Could be allocated to savers rather than
holders of capital (Red Book, pp. 50-51) • In practice, allocated to holders of capital• Treatment of timing – Red Book, Treasury
Consistency with individual tax
• Dividend taxes allocated to stockholders• To be consistent, corporate income tax
should be allocated to corporate capital• Burman, Gravelle, Rohaly (NTA
Proceedings, 2005)
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Views of profession (1996)
• Fuchs, Krueger, Poterba (JEL, Sept. 1998)• Fraction of tax “ultimately” borne by capital
– Presumably refers to long-run incidence– Mean 41 percent, median 40 percent– Standard deviation 29 percent
• Three-quarters said 65 percent or less
Page 50
Labor and Capital Shares of the Corporate Tax Burden: International Evidence
Mihir A. Desai Harvard University and NBER
C. Fritz Foley Harvard University and NBER
James R. Hines Jr. University of Michigan and NBER
December 2007
This paper was prepared for presentation at the International Tax Policy Forum and Urban-Brookings Tax Policy Center conference on Who Pays the Corporate Tax in an Open Economy?, 18 December, 2007. The authors thank the Division of Research at Harvard Business School for financial support.
Page 51
Labor and Capital Shares of the Corporate Tax Burden: International Evidence
ABSTRACT
This paper develops and applies a simple framework for measuring the incidence of the corporate tax. This framework offers an empirical approach that jointly analyzes the degree to which owners of capital and workers share the burdens of corporate income taxes with the restriction that the overall burden is ultimately shared between them. Data on the foreign activities of American multinational firms provide wage rates and interest rates for a panel of more than 50 countries between 1989 and 2004. Evidence from applying this framework to these data indicates that between and 45 and 75 percent of the burden of corporate taxes is borne by labor with the balance borne by capital.
JEL Classifications: H22, H25, H87. Mihir A. Desai C. Fritz Foley James R. Hines Jr. Harvard Business School Harvard Business School Department of Economics Baker 265 Baker 235 University of Michigan Soldiers Field Soldiers Field 611 Tappan Street Boston, MA 02163 Boston, MA 02163 Ann Arbor, MI 48109-1220 [email protected] [email protected] [email protected]
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1
1. Introduction
While there is universal agreement with the proposition that someone ultimately bears the
burden of corporate taxes, there is considerable uncertainty, and indeed controversy, over exactly
who this might be. The obvious candidates are owners of capital, whose after-tax returns may
decline as tax rates rise, and workers, whose real wages may be adversely affected by corporate
tax increases. Theoretical efforts to examine this question offer conflicting conclusions and
demonstrate an unsettling sensitivity to underlying assumptions. These highly stylized models
also leave open the question of whether actual economies, with their messy markets and no less
messy tax systems, in fact react to corporate tax changes in the ways that the models predict.
The prevailing uncertainty over the incidence of the corporate tax is particularly
unfortunate given that the distributional consequences of alternative tax policies are of
fundamental importance to their desirability and political attractiveness. It has proven extremely
difficult to evaluate corporate tax reforms on the basis of induced effects on the distribution of
real income in the absence of reliable empirical evidence. Since there is no sense in which the
burden of corporate taxes can fail ultimately to be borne, governments and policy analysts have
been obliged to take stabs in the intellectual dark by attributing corporate tax burdens to different
taxpaying groups. In practice, these attributions have an arbitrary feel: changes in corporate tax
burdens are sometimes assigned to owners of corporate shares, sometimes to capital owners
generally, and sometimes they simply are not attributed to anyone, despite the incoherence of
such an approach.
This paper develops and tests a simple framework to analyze the incidence of the
corporate tax. The theory of tax incidence offers guidance that is employed to sharpen estimates
of the distribution of corporate tax burdens. The simple fact that corporate taxes must be paid by
someone carries the implication that, if the economy consists of labor and capital, then any tax
burden not borne by labor must be borne by capital. As a result, one can estimate the impact of
corporate taxes on wages and returns to capital jointly, imposing a restriction that the effects sum
to total tax burdens. Specifically, the theory points to the use of a seemingly unrelated system of
regressions of wages and borrowing rates on measures of corporate taxes that includes a cross-
equation restriction on the total tax effects. This method offers a more powerful, reliable, and
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2
consistent method of identifying the distribution of tax burdens than does estimating the returns
to labor or capital separately. This framework emphasizes the lessons of recent theoretical
developments, particularly Randolph (2006), that factor shares are critical for understanding the
incidence of the corporate tax.
This paper applies this framework to data collected from American multinational firms
operating in a large number of countries between 1989 and 2004. One of the benefits of using
these data is that they reflect the experiences of relatively comparable firms that report extensive
information on their operations in a consistent manner between countries and over time. This
sample excludes the United States, but includes evidence for more than 50 countries. Data on
wage rates and returns to capital are related to corporate tax rates and measures of factor shares
in several annual cross-sections and in a pooled analysis. The constraint on the coefficients
allows capital or labor to bear more than 100 percent of the burden, as some theoretical
variations suggest, but restricts the sum of the burden shares to equal one.
The results consistently indicate that corporate taxes depress both real wages and returns
to capital, with most of the burden of corporate taxes borne by labor. The baseline estimate for
the share of the burden borne by labor is 57 percent, and estimates vary between 45 and 75
percent, depending on the sample period and specification. These results are robust to the
inclusion of control variables that might otherwise explain wages and returns to capital and to the
inclusion of country fixed effects in a panel setting.
The method adopted in this paper moves part of the way toward reconciling empirical
estimates with the underlying theory of corporate tax incidence. Recent empirical efforts to
investigate corporate tax incidence focus largely on the extent to which high tax rates depress
real wages. Such an approach does not capitalize on the theoretical insight that the overall tax
burden must be shared between capital and labor. A second difference with earlier empirical
studies is that this paper analyzes data that are collected and reported on a comparable basis by
firms operating around the world. The use of these data has the potential to allay some of the
concerns that would otherwise arise from using data obtained from disparate sources.
The approach employed in the paper also has several limitations. First, the empirical
specifications rely heavily on the competitive market assumption that underlies the standard
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3
theory of tax incidence. To the degree that the theory departs from reality, the estimating
equations may be misspecified. On balance, however, the benefit of the empirical power
obtained by constraining coefficients in accordance with standard economic theory seems to
outweigh the disadvantage of relying on the theory. Second, the use of data from multinational
firms may limit the applicability of the results obtained using these data. In particular, wage
rates, returns to capital, factor shares and tax rates faced by multinational firms may be
idiosyncratic and unrepresentative of the overall economy. Again, these potential limitations
must be weighed against the benefits of employing highly comparable data for a significant
fraction of global capital flows. These limitations and other matters of interpretation are
discussed below.
Section 2 of the paper reviews some of the theoretical insights and empirical estimates
from the literature on the incidence of the corporate tax. Section 3 provides a simple framework
that leads to a set of estimating equations and describes the data employed in the paper. Section
4 presents empirical evidence on the degree to which labor and capital share the burden of the
corporate tax. Sections 5 and 6 offer interpretations of these estimates, discuss their limitations,
and conclude.
2. Corporate Taxation and the Distribution of Its Burdens.
The simple intuition that owners of corporations bear the burden of corporate taxes
appears to be surprisingly fragile. The pioneering work of Harberger (1962) identifies the source
of the common perception that owners of corporations bear the burden of the corporate tax and
also demonstrates its sensitivity to modeling assumptions by showing that returns to capital
owners can increase with a corporate tax. The simple intuition relies on the insight that
corporate tax obligations contribute to the cost of investment and thereby encourage substitution
of other productive factors (such as labor) for capital used by corporations. Labor expenses are
deductible against taxable income, so the corporate tax does not affect the marginal condition
characterizing a firm’s decision of whether or not to employ additional labor. This substitution
of labor for capital depresses the demand for capital and thereby reduces its after-tax market
return in a closed economy.
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4
Even in a closed economy, however, induced intersectoral reallocations of resources can
reverse this result. Corporate taxation increases the cost of producing corporate output, thereby
raising output prices, depressing demand, and shifting output from the corporate sector of the
economy to the noncorporate sector. This reallocation affects factor demands to the extent that
factor input ratios differ between the corporate and noncorporate sectors of the economy. If the
corporate sector of the economy has a lower capital/labor ratio than the noncorporate sector, then
the introduction of a corporate tax shifts resources into the noncorporate sector and thereby raises
the demand for capital. If this effect is large enough, then it has the potential to exceed in
magnitude the countervailing impact of factor substitution, thereby implying that higher rates of
corporate tax are associated with greater after-tax returns to capital – including capital invested
in corporations. It would then follow that labor bears the burden of the corporate tax in the form
of lower wages.
Open economy considerations further complicate the simple intuition that capital owners
bear the full burden of the corporate tax. As noted by Diamond and Mirrlees (1971), and applied
to open economies by Gordon (1986), Kotlikoff and Summers (1987a) and Gordon and Hines
(2002), any source-based capital income tax falls entirely on fixed local factors – typically labor
– in a setting with perfect capital mobility and product substitution. It follows from the
assumption of perfect capital mobility that after-tax rates of return to capital cannot differ
between countries, so higher corporate tax rates must discourage investment and thereby drive up
pretax rates of return to the point that after-tax returns remain equal. Since after-tax rates of
return to local capital do not change with corporate tax changes, it must be the case that local
labor and any other local factor whose location is fixed, the archetypal example being land, bear
the full burden of corporate taxes. Additionally, corporate taxes in large open economies may
have spillover effects. With fixed world supplies of capital, higher tax rates in one country
discourage local investment and drive investment to other countries, where it can reduce rates of
return to capital and increase wages.
Harberger (1995, 2006) and Randolph (2006) explore the sensitivity of conclusions
drawn from models of perfect capital mobility and fixed world capital supplies. They calibrate
models that incorporate what they argue are realistic estimates of relative capital intensities,
capital mobility, and product substitutability, finding that labor can be thought to bear a
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5
significant fraction of the burden of the corporate tax. In the classes of simple models used in
these papers, any imperfect substitutability between foreign and domestic traded goods
effectively operates as a form of imperfect capital mobility. As the trade and capital accounts
must balance, imperfect substitutability between traded goods implies that extensive net
borrowing is expensive as it entails importing large volumes of foreign goods for which there is
diminishing marginal substitution. Gravelle and Smetters (2006) use a computable general
equilibrium model to allow for subtler variants of imperfect product competition, concluding that
corporate capital owners may bear the lion’s share of the corporate tax burden despite the
availability of capital inflows and outflows.1
The extensive theoretical results on the incidence of the corporate tax have not been
matched with as extensive an empirical investigation. The relative absence of empirical efforts
may reflect one of the central insights of Harberger (1962) - corporate taxation must be
understood in the context of the general equilibrium of an economy. In general equilibrium, all
markets affect each other and, as a result, it is typically necessary to use national information to
evaluate the impact of a country’s system of taxing corporate income. From an estimation
standpoint this greatly reduces the extent of tax variation that can be appropriately used to
identify the distribution of tax burdens, since tax differences among firms and between industries
may have broader effects that would be overlooked in standard partial equilibrium estimation.
The need to identify tax effects at national levels severely restricts the available sample from
which to draw inferences, and as a result, makes it particularly difficult to obtain reliable
empirical estimates.
Despite these challenges, several recent studies attempt to measure tax incidence in open
economies.2 Arulampalam et al. (2007), Felix (2007) and Hasset and Mathur (2006) all employ
international databases to explore the extent to which corporate taxes influence wages, thereby
indirectly assessing the incidence of the corporate tax. Arulampalam et al. (2007) employ micro
data from four countries over five years and conclude that between 60 to 100 percent of the
1 For more on the importance of product substitutability, see Davidson and Martin (1985) and Gravelle and Kotlikoff (1989, 1993). 2 There were several earlier efforts to empirically examine the incidence of the corporate tax, typically through time series analysis of domestic data. These include Krzyzaniak and Musgrave (1963), Gordon (1967), Dusansky (1972), Oakland (1972) and Sebold (1979). For excellent reviews of the existing empirical and theoretical literatures, see Auerbach (2006) and Gentry (2007).
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6
corporate tax is passed on to labor. Given the limited number of countries in their estimating
sample, Arulampalam et al. (2007) are unable to estimate the impact of national tax rate
differences, instead considering differences in the tax situations of individual firms. They
analyze the extent to which a firm facing a higher tax burden than other firms shares the cost of
its disadvantaged tax situation with workers in the form of lower wages. Felix (2007) and
Hassett and Mathur (2006) instead consider the effects of national tax rates on wage
determination in competitive markets, employing measures of local wage rates in a much larger
sample of countries, and finding large effects of corporate taxes on wages. These empirical
studies offer specifications that investigate the relative importance of economic openness, the
magnitude of capital flows, the global nature of firms and the skill composition of the workforce
to the incidence of the corporate tax.
As noted by Gravelle and Hungerford (2007) and Felix (2007), some of the reported
wage equations indicate that labor bears an enormous cost of corporate taxation, the implied
burdens in some specifications approaching twenty times the revenue raised by corporate taxes.
Taken at face value, these estimates suggest that the distortions associated with the corporate tax
are huge. Another possibility is that these results reflect the impact of data inconsistencies or
correlated omitted variables. In order to assess the reliability of these estimates it is helpful to
compare them to results obtained using a consistent data set and an estimating method that
implicitly controls for some country-specific factors.
3. Estimation Method and Data.
This section sketches a framework that can be used to estimate corporate tax incidence.
The first part of this section considers the implications of economic openness for the incidence of
corporate income taxes, while the second part of the section describes the data used to estimate
the impact of corporate taxation.
3.1 Accounting for tax changes.
Consider a firm that produces output with capital (K) and labor (L) inputs, using a
production function denoted Q(K, L), and with output price normalized to unity. The firm’s
capital investments are assumed not to depreciate, and are financed with a combination of debt
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7
(B) and equity (E). Labor is paid a wage of w, and debt holders receive a return of r. Denoting
by ρ the firm’s after-corporate-tax rate of return to equity investments, and denoting the
corporate tax rate by τ , it follows that:
(1) ( )[ ]( )τρ −−−≡ 1, rBwLLKQE .
Differentiating this expression with respect toτ , and applying the envelope theorem, produces:
(2) ( ) ( ) ( )[ ]rBwLLKQBddrL
ddwE
dd
−−−=−+−+ ,11 ττ
τττ
ρ .
The left side of equation (2) consists of three terms, of which the first is the change in returns to
equity holders, the second is the change in after-tax labor cost, and the third is the change in
after-tax borrowing costs. The right side of equation (2) is simply the effect of a tax change on
after-tax profits. Hence equation (2) reflects that higher tax costs must be compensated by a
reduction of wages or capital returns, or equivalently, that some factor in the economy must bear
the burden of corporate taxes.
It is noteworthy that output prices are normalized to one in the derivation of equation (2),
which implies that output prices are assumed not to change as corporate tax rates change. In a
single sector closed economy this assumption would simply represent a normalization of units,
having no economic consequence, but in a multisector economy, or an open economy, the
assumption that output prices are unaffected by corporate tax rates rules out effects that arise
from intersectoral reallocation of resources (as in Harberger, 1962) or changing terms of trade
between countries. For a small open economy in which the corporate and noncorporate sectors
produce goods for a competitive world market, it follows (Gordon and Hines, 2002) that output
prices cannot change in response to corporate tax changes, making the fixed price assumption a
reasonable specification in this situation.
Suppose that capital investments are financed with a fraction α of debt and ( )α−1 of
equity. Then equation (1) implies:
(3) ( ) ( )[ ]( )τααρ −−−≡− 1,1 KrwLLKQK ,
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8
and differentiating with respect to τ produces:
(4) ( ) ( ) ( ) ( )[ ]KrwLLKQKddrL
ddwK
dd ατα
ττ
τα
τρ
−−−=−+−+− ,111 .
If investors are indifferent between receiving certainty-equivalent returns in the form of
bond interest and equity returns, then r=ρ , and (4) implies:
(5) ( ) ( ) ( )[ ]KrwLLKQLddwK
dd ατ
τατ
τρ
−−−=−+− ,11 .
In an extreme case, in which 0≅α , and investments are financed almost entirely with equity, (5)
implies:
(6) ( ) ( )[ ]wLLKQLddwK
ddr
−−=−+ ,1 τττ
.
Equation (6) clarifies that the burdens of corporate tax increases are shared between labor and
capital.
Under these conditions, the use of equation (1) allows equation (6) to be rewritten as:
(7) ( ) ( )ττττ −
−=−+1
111 rKLwddw
wrK
ddr
r.
This in turn implies:
(8) ( ) ( )ττττ −
−=−+1
1111rKLw
ddw
wddr
r.
Defining a labor share of output as QwLs ≡ , it follows that ( )
( ) ( )ss
wLQLw
rKLw
−=
−=
−1
1 τ . By
also applying that ( )ττ −−=
1ddr
ddr and ( )ττ −
−=1ddw
ddw , equation (8) becomes:
(9) ( )( )
( )( )
( ) 11
11
11
=−
−−
+−
− ss
wddw
rddr τ
ττ
τ.
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9
3.2. Empirical implications.
In order to move to an estimating framework, it is useful to revisit an estimating equation
that is employed to assess the effect of corporate taxes on wages. The corporate tax rate is not
the only economic variable that affects wages and returns to capital. Letting X denote a vector of
country attributes relevant to wage determination, and defining ( )s
ss −≡
1* , it follows that the
traditional framework for estimating wages can framed as:
(10) ( ) ετγβ +−+= 1ln*ln sXw .
In this setting, ( )( )
( )ss
wddw
−−
−=
11
1τ
τγ . Note that this corresponds to the second half of the left
hand side of equation (9). Strictly speaking, equation (10) requires that s* not be a function of
τ .
One can readily imagine also estimating the parallel relationship for interest rates:
(11) ( ) ετγβρ ′+−′+′= 1lnln X ,
for which ( )( )ρτ
τργ −−
=′1
1dd .
The relationship expressed in equation (9) carries implications for the estimated
relationships (10) and (11), since these equations are not independent, but instead must satisfy an
adding-up constraint. In particular, equation (9) implies that:
(12) 1=′+ γγ .
This cross-equation restriction, which does not constrain the values of γ and γ’ between zero and
one, can then be employed when jointly estimating equations (10) and (11). It is worth noting
that coefficients derived from estimating these equations without imposing the cross-equation
constraint do not have natural interpretations, as they would then capture efficiency effects of
corporate taxation, and the influence of correlated omitted variables, instead of the determinants
of relative burdens.
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10
The coefficients γ and γ ′ from equations (10) and (11) serve to identify the relative tax
burdens on the two factors of production. To see this, note that ( )QrK
QwLQs =
−=−1 and
therefore:
(13) ( ) ( ) ( )ττ −=
−−
1ln1
1ln1
ddr
QK
rddrs .
Similarly, QwLs = , so
(14) ( ) ( )ττ −=
− 1ln1
1ln ddw
QL
wddws .
Equations (13) and (14) lead directly to:
(15) ( ) ( )
( )
( )[ ]( )[ ]τ
τ
τ
τγγ
−−
=
−
−−=′ 1ln
1ln1
1ln
11ln1
ddrKddwL
rddr
wddw
ss
.
From the envelope theorem, the effect of a tax change on returns to labor is given by
( )[ ]τ−1lnddwL , and the effect of a tax change on returns to capital is given by
( )[ ]τ−1lnddrK . Hence the right side of (15) is simply the ratio of the burdens borne by labor
and capital, respectively, to a small tax change. This ratio equals the ratio of the two estimated
coefficients, γ and γ ′ .
It follows from equation (15) that estimating γ and γ ′ from equations (10) and (11),
constraining the resulting estimates to sum to one, provides direct estimates of the relative shares
of the corporate tax burden borne by labor and by capital. These shares are independent of the
deadweight loss of corporate taxation, reflecting tax burdens rather than total tax collections. For
example, if 67.0=γ , so that labor bears two thirds of the burden of corporate taxation, and the
deadweight loss of the corporate tax equals 50 percent of revenue collected, then labor’s total
burden equals 100 percent of corporate tax revenue, with capital bearing a burden equal to an
additional 50 percent of corporate tax revenue. An important way in which this estimating
Page 62
11
method differs from its predecessors is that it identifies relative, but not total, burdens of the
corporate tax.
3.3. Data
The empirical work presented in section 4 is based on the most comprehensive and
reliable available data on the activities of U.S. multinational firms. The Bureau of Economic
Analysis (BEA) Benchmark Surveys of U.S. Direct Investment Abroad in 1989, 1994, 1999, and
2004 provide a panel of data on the financial and operating characteristics of U.S. multinational
affiliates.3 As discussed above, the question of incidence recommends the use of data that are
aggregated at the national level. Accordingly, an aggregation of the majority-owned activities of
foreign affiliates at the country-year level is employed in the analysis below.
Table 1 presents means, medians, and standard deviations of variables used in the
regressions that follow. The wage rate is defined as the ratio of total employee compensation
(including benefits) paid by majority owned foreign affiliates to numbers of employees. Since
the BEA data are measured in U.S. dollars, these can be interpreted as real wage rates to the
extent that purchasing power parity holds and thereby automatically corrects for the effects of
local inflation. As profit-type returns may reflect tax-motivated reallocation of pretax income,
returns to capital are captured by measuring average interest rates paid on the liabilities of
foreign affiliates. The interest rate is computed as the ratio of interest payments made by
majority foreign owned affiliate to the aggregate level of current liabilities and long-term debt,
with both variables again measured in U.S. dollars.4 Tax rates are measured for each country-
year combination as the ratio of aggregate foreign income tax payments to aggregate net income
plus foreign income tax payments. Given that country-specific values of s also have the potential
to reflect tax-motivated income reallocation, yearly aggregate values of s for the total foreign
activities of U.S. multinational firms are used in their place. Specifically, s is calculated as the
ratio of total employee compensation to the sum of total employment compensation, net income,
foreign income taxes and depreciation in a given year.
3 The International Investment and Trade in Services Survey Act governs the collection of the data and the Act ensures that “use of an individual company’s data for tax, investigative, or regulatory purposes is prohibited.” Willful noncompliance with the Act can result in penalties of up to $10,000 or a prison term of one year. As a result of these assurances and penalties, BEA believes that coverage is close to complete and levels of accuracy are high. 4 See Desai, Foley and Hines (2004) for a discussion and analysis of this interest rate variable and its alternatives.
Page 63
12
In addition to these variables constructed from the BEA data, some regressions include
control variables used to explain wages and interest rates. For wages, the Barro-Lee measure of
average workforce education, measured in years, and obtained from Barro and Lee (2000), is
used as an explanatory variable. For interest rates, national measures of creditor rights, drawn
from Djankov, McLiesh, and Shleifer (2005), and local inflation rates, drawn from the World
Development Indicators, are included as explanatory variables. Desai, Foley and Hines (2004)
note that stronger legal protections for lenders and higher inflation rates are associated with
lower interest rates.5
4. The Distribution of Corporate Tax Burdens.
This section reports the results of estimating the distribution of corporate tax burdens
using the data from American multinational firms described in section 3.
4.1. Annual cross-sections
Table 2 presents results of seemingly unrelated systems of equations that restrict the sum
of the tax coefficients in the wage and interest rate specifications to equal one. The specification
explaining wages and the specification explaining interest rates are not therefore separate
regressions but instead components of a single regression. The estimated 0.6943 coefficient
estimated in the first regression implies that higher tax rates are associated with lower wages,
since 69 percent of the total tax burden is borne by labor. The corresponding 0.3057 coefficient
carries the mirror image implication that 31 percent of the total burden is borne by capital. The
estimated interest rate effect does not differ significantly from zero, but does differ significantly
from one, which is consistent with (indeed, implied by) the statistical significance of the
estimated wage effect reported in column one.
The second system of equations adds explanatory variables to the wage and interest rate
specifications. Specifically, the wage specification now includes the Barro-Lee measure of
workforce education, and the interest rate specification now includes measures of creditor rights
and local inflation. Since the regression requires information on all of these variables for any
5 Desai, Foley and Hines (2004) also report that higher corporate income tax rates are associated with lower interest rates in their affiliate-level specifications that control for various firm and affiliate attributes, a finding that is consistent with the results reported in section 4.
Page 64
13
country included in the sample, the sample size falls from 52 observations for the regression
reported in columns one and two to just 41 observations. Workforce schooling has a large and
statistically significant effect on wages, the 0.2056 coefficient reported in column three implying
that each additional year of education increases employment compensation by about 20%. The
creditor rights and inflation variables appear to have only insignificant effects on reported
interest rates.
The inclusion of additional explanatory variables and restriction of the sample size
together reduces the magnitude of the estimated tax coefficient in the wage specification to
0.4839. There is a corresponding rise in the tax coefficient in the interest rate specification to
0.5161. Hence from these coefficients it appears that roughly half of the burden of corporate
taxation is borne by labor in the form of reduced wages, and half by capital in the form of
reduced returns.
In order to consider the dependence of these results to the use of 2004 data, Panels A, B,
and C of Table 3 repeat these regressions for cross sections of data covering 1999, 1994, and
1989. The results are broadly consistent with those reported in Table 2, though the estimated
burden on labor tends to be somewhat higher in these regressions than in the regressions reported
in Table 2. For example, regression (4) in Panel B of Table 3 reports estimated coefficients from
a regression explaining 1994 wages and interest rates as functions of local tax rates, worker
education, creditor rights and inflation. The estimated 0.7456 coefficient implies that three
quarters of the burden of corporate taxation is borne by labor, with the remaining 25 percent
borne by capital. This estimated labor share is significantly different from zero, but not
statistically different from one, implying that these results do not rule out the possibility that
labor bears 100 percent of the burden of corporate taxation, whereas they are inconsistent with
labor bearing none of the burden.
4.2. Panel evidence
Table 4 presents estimated coefficients from regressions using data from all four
benchmark survey years, 1989, 1994, 1999, and 2004. The estimated 0.7118 coefficient
obtained from the first seemingly unrelated regression implies that 71 percent of the burden of
corporate taxation is borne by labor, with the remaining 29 percent borne by capital. The
Page 65
14
relatively small standard error suggests that it is possible to reject that the labor share of the tax
burden is either zero or 100 percent.
The second pair of specifications repeats this analysis but adds education, creditor rights,
and inflation as controls. The need to incorporate this information reduces the sample size. The
estimated labor share falls in these regressions, the 0.6152 coefficient in column three implying
that 62 percent of the burden of corporate taxes is borne by labor, again with a small enough
standard error that it is possible to reject that the labor share is either zero or 100 percent.
The third seemingly unrelated system of equations omits the control variables but
introduces country fixed effects, thereby estimating tax effects from changes in corporate tax
rates between benchmark survey years. This approach implicitly controls for country attributes
that do not change over the 1989-2004 period. The 0.5665 coefficient in column five implies
that labor bears 57 percent of the burden of corporate taxes. Together with the small associated
standard error, this coefficient implies that it is possible to reject that labor’s share of the total tax
burden is outside the range of 40-74 percent.
Finally, the fourth pair of specifications presented in Table 4 adds country fixed effects to
the second pair of specifications. The results of this regression suggest that labor bears a
somewhat smaller share of the total corporate tax burden than does the third regression. The
0.4469 coefficient in column seven implies that labor bears 45 percent of the total tax burden, the
remaining 55 percent falling on capital.
The regressions reported in Table 4 include specifications that interact local tax rates with
measured values of s*, a function of aggregate shares of labor compensation in total returns.
Since the sample mean value of s is 0.4823, it does little injustice to the data simply to fix the
value of s* at unity, thereby effectively removing this interaction from the tax term on the right
side of the wage specifications. Table 5 reports results from estimating the same regressions as
those reported in Table 4, but imposing that s* = 1.
The estimated coefficients reported in Table 5 are similar to those reported in Table 4, the
primary difference being that the estimated labor share of the total tax burden is somewhat
higher in the specifications in Table 5. For example, the 0.7521 coefficient estimated from the
Page 66
15
first regression implies that labor bears three quarters of the total burden of corporate taxes,
which compares to the 0.7118 coefficient reported for the analogous regression in Table 4. The
differences between the results in these two tables are the greatest for the third and fourth
regressions, reported in columns 5-8, that include country fixed effects. Thus, the 0.7326
coefficient estimated from the third regression presented in Table 5 implies that labor bears 73
percent of the corporate tax burden, whereas the corresponding 0.5665 coefficient in Table 4
implies that labor bears only 57 percent of the burden. Similarly, the 0.5889 coefficient
estimated from the fourth regression presented in column 8 of Table 5 suggests a notably larger
labor share of total burdens than does the corresponding 0.4469 coefficient in Table 4. It is clear,
therefore, that time-varying labor shares of total output are not responsible for the significant
labor shares of total tax burdens implied by the results reported in Table 4. It is also the case
that, at least in these specifications, treating labor shares in an arbitrary manner by imposing a
value that removes the labor share variable from the estimation has the effect of increasing the
estimated fraction of the tax burden borne by labor.
5. Interpretation
This section considers two issues that arise in interpreting the empirical results. The first
of these issues is the consistency of the empirical estimates with the theoretical literature that
emphasizes perfect international capital mobility. The second issue is the extent to which it is
appropriate to draw broad economic conclusions from an analysis based on data drawn from
American multinational firms.
5.1. Local effects and spillover effects
Do the regression estimates presented above capture the entire distributional
consequences of corporate tax changes? These cross sectional and panel regressions provide
estimates of the average effect of tax differences on after-tax returns to local factors. As
emphasized in the Randolph (2006) application of the Kotlikoff and Summers (1987a)
framework, a corporate tax change in one country typically affects wages and rates of return to
capital in all other countries. As such, the statistical evidence presented in section four does not
identify all of the distributional effects of a country’s corporate tax rate. The evidence instead
isolates any effect of international differences in corporate tax rates on differences in factor
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16
returns, not incorporating any distributional impact that average corporate tax rate levels may
have.
If the assumption of perfect capital mobility embodied in the Randolph (2006) and
Kotlikoff and Summers (1987a) approach were correct, then regressions such as those presented
in section four would show that borrowing rates are unrelated to corporate income tax rates.
Nonetheless, Randolph’s model implies that roughly 30 percent of the burden of U.S. corporate
income taxes is borne by U.S. capital. This burden arises because, with a fixed worldwide
capital stock, worldwide capital bears 100 percent of the burden of U.S. corporate taxation and
the U.S. comprises 30 percent of the worldwide capital stock. Consequently, these models imply
that the worldwide rate of return to capital varies year by year according to how heavily the
whole world taxes corporate income. Regressions, however, do not pick up this effect as they
are based on comparing rates of return between countries in the same year.
How should one interpret the findings in section four in light of the effects of average
world tax rates identified in the work of Kotlikoff and Summers (1987a), and applied in the
Randolph (2006) model? From the standpoint of a small open economy, the cross sectional
results likely identify the full burden of the corporate tax, given that spillover effects from a
small open economy to the rest of the world, and thereby back to the small country, are apt to be
tiny. For a large open economy such as the United States, corporate tax changes have the
potential to have sizable spillover effects on world interest rates and wages that are not captured
in the empirical estimates provided in this paper.
It is difficult to combine the effects of average world tax rates with cross-sectional
estimates to project the distributional impact of corporate tax changes in large countries. Simply
adding empirical estimates of within-country effects of corporate tax changes and the numerical
simulations from Randolph’s model for spillover effects would be incorrect. Indeed, the
evidence that interest rates vary with corporate income tax rates, for example, is inconsistent
with assumptions underlying the Randolph model, instead being consistent with a framework in
which there is imperfect international capital mobility, at least in the short run. Furthermore, the
strong and untested assumption of Randolph’s model that the total world capital supply is
unaffected by after-tax returns is responsible for at least some of the model’s stark conclusions.
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17
While some of the implications of average world corporate tax rates highlighted by Randolph’s
calculations certainly should be incorporated in a complete assessment of the effects of a U.S.
corporate tax reform, in the absence of empirical evidence it is difficult to know exactly to what
extent it is necessary to modify conclusions that can be drawn from cross-sectional evidence.
5.2. Multinational firms and national economies
If the activities of American multinational firms operating abroad were perfectly
representative of their host economies, then estimating the relationship between taxes, wages and
returns to capital in the manner employed in section four would constitute a straightforward
application of the framework sketched in section three. In reality, available evidence on the
activities of multinational firms suggests that multinational firms differ in important dimensions
from local firms. For example, there is a consensus that wages paid by multinational firms
exceed those paid by local firms.6 Such differences, while well-established, need not influence
the interpretation of the empirical results if multinational firms pay wages that exceed prevailing
local wages by percentages that are not influenced by corporate tax rates. Similarly, while
foreign investors may confront borrowing costs that differ from those facing local firms, the use
of interest rates paid by multinational firms as indicators of local capital returns produces valid
inferences as long as the ratio of these two borrowing costs is not itself influenced by corporate
tax rates.
These considerations and others suggest that it would be worthwhile to estimate the
extent to which corporate taxes affect wages and capital returns in a simultaneous system using
data that cover more than the foreign operations of American multinational firms. One
formidable challenge facing such an estimation is the compilation of consistent data for a large
enough number of countries to provide statistical reliability for the results. While there is good
reasons to expect that conclusions drawn from the environment facing American firms are likely
to apply to entire economies, this is a proposition that might well benefit from further empirical
exploration.
6 The wage premium paid by the foreign affiliates of multinational firms reflects the greater than average skills of the labor force they employ, rather than a tendency to assign some home country workers to foreign locations. U.S. citizens represented less than 0.3 percent of the employees of foreign affiliates of American multinational firms in 1999, far too small a fraction to influence average wages significantly.
Page 69
18
6. Conclusion
Who bears the burden of corporate taxes in modern open economies? Economic theory
points to a range of possibilities. While the available theory does not identify specific answers, it
does suggest a worthwhile empirical framework that can be used to estimate the distribution of
corporate tax burdens. Applying this framework to data on American multinational firms that
operate around the world produces estimates that imply that the burden of corporate taxation is
borne by labor to a significant degree. These estimates evaluate the extent to which differences
in corporate tax rates are associated with differences in after-tax returns to capital and labor,
likely capturing the full burden of corporate taxes in small economies and most if not close to all
of the distributional effects of corporate taxes in large economies.
It is possible to bring both more evidence and sharper theory to bear on the question of
the distributional impact of corporate taxation. The use of aggregate national data collected on a
consistent basis for a large number of countries has the potential to enlighten our understanding
of the workings of corporate taxation on parts of economies that are less influenced by foreign
direct investment. Tax incidence theory might usefully distinguish the effects of tax rates and
tax bases, the treatment of individual industries and sectors, and other realistic features of
corporate taxation that could be incorporated in future empirical work. For all that remains to be
done, however, it is a mistake to overlook the evidence before us, in which it appears that the
burden of corporate taxation is not, as some have thought, entirely borne by owners of
corporations or owners of capital, but instead shared between labor and capital.
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19
References
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Djankov, Simeon, Caralee McLiesh, and Andrei Shleifer (2005). “Private Credit in 129 Countries,” Working Paper, Harvard University.
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Felix, R. Alison (2007), “Passing the Burden: Corporate Tax Incidence in Open Economies,” Chapter 1, Ph.D. Dissertation, University of Michigan.
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Gravelle, Jane G. and Laurence J. Kotlikoff (1993). “Corporate Tax Incidence and Inefficiency When Corporate and Noncorporate Goods are Close Substitutes,” Economic Inquiry, 31(4):501-516.
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Page 72
Mean MedianStandard Deviation
LN (Wage) 3.0984 3.2091 0.7365
LN (Interest Rate) -3.6777 -3.6379 0.7374
s 0.4823 0.4931 0.0584
LN (1-Tax Rate) -0.3744 -0.2971 0.3793
((1-s )/s ) * LN (1-Tax Rate) -0.3989 -0.3118 0.3893
Workforce Schooling 7.6838 7.8930 2.2323
Creditor Rights 2.0695 2.0000 1.1362
LN (Inflation) -2.9234 -2.8895 1.3894
Table 1Descriptive Statistics
Notes: LN (Wage) is the natural log of employment compensation per employee as measured in the BEA data. LN (Interest Rate) is the natural log of the ratio of interest payment to current liabilities and long term debt, computed using BEA data. Tax Rates are imputed from the BEA data by taking the ratio of foreign income taxes paid to the sum of foreign income taxes paid and net income. S is the ratio of employment compensation to the sum of employment compensation, net income, foreign income taxes, and depreciation and it is calculated at the annual level using aggregate worldwide BEA data. Workforce Schooling is the average schooling years in the population over 25 years old provided in Barro and Lee (2000). Creditor Rights is an index of the strength of creditor rights developed in Djankov, McLiesh, and Shleifer (2005); higher levels of the measure indicate stronger legal protections. LN (Inflation) is the natural log of the rate of inflation as measured using GDP deflator data drawn from the World Development Indicators.
Page 73
Dependent Variable: LN (Wage) LN (Interest Rate) LN (Wage) LN (Interest
Rate)
Constant 3.6416 -3.8137 1.8783 -3.7709(0.1271) (0.1053) (0.3108) (0.3406)
((1-s )/s ) * LN (1-Tax Rate) 0.6943 0.4839(0.2047) (0.1847)
LN (1-Tax Rate) 0.3057 0.5161(0.2047) (0.1847)
Workforce Schooling 0.2056(0.0363)
Creditor Rights 0.0442(0.0725)
LN (Inflation) -0.0154(0.0914)
No. of Obs.Log Likelihood
Notes: This table presents the results of constrained, seemingly unrelated regressions using 2004 data. LN (Wage) is the natural log of employment compensation per employee as measured in the BEA data. LN (Interest Rate) is the natural log of the ratio of interest payment to current liabilities and long term debt, computed using BEA data. Tax Rates are imputed from the BEA data by taxing the ratio of foreign income taxes paid to the sum of foreign income taxes paid and net income. s is the ratio of employment compensation to the sum of employment compensation, net income, foreign income taxes, and depreciation and it is calculated at the annual level using aggregate worldwide BEA data. Workforce Schooling is the average schooling years in the population over 25 years old provided in Barro and Lee (2000). Creditor Rights is an index of the strength of creditor rights developed in Djankov, McLiesh, and Shleifer (2005); higher levels of the measure indicate stronger legal protections. LN (Inflation) is the natural log of the rate of inflation as measured, using GDP deflator data drawn from the World Development Indicators.
2004 Cross-Sectional Constrained Seemingly Unrelated Regressions
Table 2
-103 -61
(1) (2)
52 41
Page 74
Dep
ende
nt
Vari
able
:LN
(Wag
e)LN
(I
nter
est
Rat
e)LN
(Wag
e)LN
(I
nter
est
Rat
e)LN
(Wag
e)LN
(I
nter
est
Rat
e)LN
(Wag
e)LN
(I
nter
est
Rat
e)LN
(Wag
e)LN
(I
nter
est
Rat
e)LN
(Wag
e)LN
(I
nter
est
Rat
e)
Con
stan
t3.
3461
-3.7
290
2.24
37-3
.339
63.
3214
-3.5
696
1.81
32-2
.971
13.
0581
-3.0
228
1.81
19-2
.120
0(0
.148
8)(0
.153
0)(0
.381
4)(0
.266
1)(0
.118
5)(0
.106
1)(0
.340
6)(0
.181
5)(0
.128
7)(0
.132
3)(0
.328
6)(0
.261
3)
0.45
470.
7241
0.72
630.
7456
0.56
950.
5538
(0.3
426)
(0.3
222)
(0.1
802)
(0.2
190)
(0.1
328)
(0.1
229)
0.54
530.
2759
0.27
370.
2544
0.43
060.
4462
(0.3
426)
(0.3
222)
(0.1
802)
(0.2
190)
(0.1
328)
(0.1
229)
0.14
290.
1860
0.17
17(0
.043
4)(0
.040
9)(0
.042
1)
0.06
23-0
.032
7-0
.052
5(0
.082
6)(0
.053
6)(0
.096
0)
LN (I
nfla
tion)
0.10
360.
1570
0.31
25(0
.063
0)(0
.045
4)(0
.070
7)
No.
of O
bs.
Log
Like
lihoo
d
((1-
s)/s
) * L
N (1
-Ta
x R
ate)
Wor
kfor
ce
Scho
olin
g
Cre
dito
r Rig
hts
LN (1
-Tax
Rat
e)
Tab
le 3
Alte
rnat
ive
Ann
ual C
ross
-Sec
tiona
l Res
ults
Pane
l A: 1
999
(1)
(2)
(3)
(4)
(5)
(6)
-97
-54
Not
es: T
his t
able
pre
sent
s the
resu
lts o
f con
stra
ined
seem
ingl
y un
rela
ted
regr
essi
ons u
sing
dat
a fr
om 1
999,
199
4, a
nd 1
989
in P
anel
s A, B
, and
C, r
espe
ctiv
ely.
LN
(Wag
e) is
the
natu
ral l
og o
f em
ploy
men
t co
mpe
nsat
ion
per e
mpl
oyee
as m
easu
red
in th
e B
EA d
ata.
LN
(Int
eres
t Rat
e) is
the
natu
ral l
og o
f the
ratio
of i
nter
est p
aym
ent t
o cu
rren
t lia
bilit
ies a
nd lo
ng te
rm d
ebt,
com
pute
d us
ing
BEA
dat
a. T
ax R
ates
ar
e im
pute
d fr
om th
e B
EA d
ata
by ta
the
ratio
of f
orei
gn in
com
e ta
xes p
aid
to th
e su
m o
f for
eign
inco
me
taxe
s pai
d an
d ne
t inc
ome.
s is
the
ratio
of e
mpl
oym
ent c
ompe
nsat
ion
to th
e su
m o
f em
ploy
men
t co
mpe
nsat
ion,
net
inco
me,
fore
ign
inco
me
taxe
s, an
d de
prec
iatio
n, c
alcu
late
d at
the
annu
al le
vel u
sing
agg
rega
te w
orld
wid
e B
EA d
ata.
Wor
kfor
ce S
choo
ling
is th
e av
erag
e sc
hool
ing
year
s in
the
popu
latio
n ov
er 2
5 ye
ars o
ld p
rovi
ded
in B
arro
and
Lee
(200
0).
Cre
dito
r Rig
hts i
s an
inde
x of
the
stre
ngth
of c
redi
tor r
ight
s dev
elop
ed in
Dja
nkov
, McL
iesh
, and
Shl
eife
r (20
05);
high
er le
vels
of t
he m
easu
re in
dica
te
stro
nger
lega
l pro
tect
ions
. LN
(Inf
latio
n) is
the
natu
ral l
og o
f the
rate
of i
nfla
tion
as m
easu
red
usin
g G
DP
defla
tor d
ata
draw
n fr
om th
e W
orld
Dev
elop
men
t Ind
icat
ors.
5031
5039
5242
Pane
l C: 1
989
Pane
l B: 1
994
-125
-81
-107
-44
Page 75
Dependent Variable: LN (Wage)
LN (Interest
Rate)
LN (Wage)
LN (Interest
Rate)
LN (Wage)
LN (Interest
Rate)
LN (Wage)
LN (Interest
Rate)
Constant 3.3823 -3.5698 1.8567 -2.8089 2.3000 -3.0667 1.3252 -2.8009(0.0661) (0.0648) (0.1762) (0.1341) (0.3282) (0.5003) (0.3080) (0.2974)
0.7118 0.6152 0.5665 0.4469(0.1002) (0.0909) (0.0843) (0.0734)
0.2882 0.3848 0.4335 0.5531(0.1002) (0.0909) (0.0843) (0.0734)
0.1878 0.3182(0.0212) (0.0499)
0.0274 0.1407(0.0416) (0.1438)
LN (Inflation) 0.2206 0.2340(0.0338) (0.0369)
Country Fixed Effects?No. of Obs.Log Likelihood
(4)
204 153 204 153N N Y Y
Creditor Rights
(1) (2) (3)
Notes: This table presents the results of constrained seemingly unrelated regressions using pooled data from 2004, 1999, 1994, and 1989. LN (Wage) is the natural log of employment compensation per employee as measured in the BEA data. LN (Interest Rate) is the natural log of the ratio of interest payment to current liabilities and long term debt, computed using BEA data. Tax Rates are imputed from the BEA data by taxing the ratio of foreign income taxes paid to the sum of foreign income taxes paid and net income. s is the ratio of employment compensation to the sum of employment compensation, net income, foreign income taxes, and depreciation, calculated at the annual level using aggregate worldwide BEA data. Workforce Schooling is the average schooling years in the population over 25 years old provided in Barro and Lee (2000). Creditor Rights is an index of the strength of creditor rights developed in Djankov, McLiesh, and Shleifer (2005); higher levels of the measure indicate stronger legal protections. LN (Inflation) is the natural log of the rate of inflation as measured using GDP deflator data drawn from the World Development Indicators.
Panel Analysis: 1989, 1994, 1999, and 2004
Table 4
-463 -272 -178 -85
((1-s )/s ) * LN (1-Tax Rate)
LN (1-Tax Rate)
Workforce Schooling
Page 76
Dependent Variable: LN (Wage)
LN (Interest
Rate)
LN (Wage)
LN (Interest
Rate)
LN (Wage)
LN (Interest
Rate)
LN (Wage)
LN (Interest
Rate)
Constant 3.3800 -3.5849 1.9249 -2.8496 2.3131 -3.6142 1.5434 -2.8682(0.0644) (0.0647) (0.1760) (0.1320) (0.3088) (0.4615) (0.3006) (0.2879)
0.7521 0.6989 0.7326 0.5889(0.1006) (0.0924) (0.0825) (0.0748)
0.2479 0.3011 0.2674 0.4111(0.1006) (0.0924) (0.0825) (0.0748)
0.1805 0.2660(0.0212) (0.0494)
0.0277 0.1220(0.0407) (0.1392)
LN (Inflation) 0.2179 0.2330(0.0332) (0.0358)
Country Fixed Effects?No. of Obs.Log Likelihood
Notes: This table presents the results of constrained seemingly unrelated regressions using pooled data from 2004, 1999, 1994, and 1989. In these regressions, the value of the labor share, s , is fixed at 0.5. LN (Wage) is the natural log of employment compensation per employee as measured in the BEA data. LN (Interest Rate) is the natural log of the ratio of interest payment to current liabilities and long term debt, computed using BEA data. Tax Rates are imputed from the BEA data by taxing the ratio of foreign income taxes paid to the sum of foreign income taxes paid and net income. Workforce Schooling is the average schooling years in the population over 25 years old provided in Barro and Lee (2000). Creditor Rights is an index of the strength of creditor rights developed in Djankov, McLiesh, and Shleifer (2005); higher levels of the measure indicate stronger legal protections. LN (Inflation) is the natural log of the rate of inflation as measured using GDP deflator data drawn from the World Development Indicators.
Panel Analysis with Fixed Values for the Labor Share
Table 5
-461 -268 -167 -76
((1-s )/s ) * LN (1-Tax Rate)
LN (1-Tax Rate)
Workforce Schooling
Creditor Rights
(1) (2) (3) (4)
204 153 204 153N N Y Y
Page 77
Prel
imin
ary
and
Inco
mpl
ete:
Do
Not
Quo
te
Taxe
s and
Wag
es
By
Kev
in A
. Has
sett
AEI
And
Apa
rna
Mat
hur
AEI
Mar
ch 6
, 200
6
____
____
____
____
____
____
____
____
____
____
____
____
____
____
____
____
____
____
Dire
ctor
of
econ
omic
pol
icy
stud
ies
and
rese
arch
fel
low
, th
e A
mer
ican
Ent
erpr
ise
Inst
itute
, re
spec
tivel
y.
We
than
k A
lan
Aue
rbac
h an
d D
oug
Hol
tz-E
akin
for
hel
pful
co
mm
ents
, and
Ann
e M
oore
for e
xcel
lent
rese
arch
ass
ista
nce.
Abs
trac
t
Usi
ng p
anel
dat
a fo
r 72
coun
tries
and
22
year
s, w
e ex
plor
e th
e lin
k be
twee
n ta
xes
and
man
ufac
turin
g w
ages
. W
e fin
d, c
ontro
lling
for
mac
roec
onom
ic v
aria
bles
that
hav
e
been
fou
nd i
n th
e lit
erat
ure
to i
nflu
ence
wag
es,
stat
istic
ally
sig
nific
ant
evid
ence
tha
t
wag
e ra
tes a
re n
ot re
spon
sive
to m
edia
n or
ave
rage
inco
me
tax
rate
s. W
e fin
d th
at w
ages
are
sign
ifica
ntly
resp
onsi
ve to
cor
pora
te ta
xatio
n, a
nd th
at th
e re
spon
sive
ness
of w
ages
to
corp
orat
e ta
xatio
n is
lar
ger
in s
mal
ler
coun
tries
. W
e al
so f
ind
that
tax
and
wag
e
char
acte
ristic
s of
nei
ghbo
ring
coun
tries
, w
heth
er g
eogr
aphi
c or
eco
nom
ic,
have
a
sign
ifica
nt e
ffec
t on
dom
estic
wag
es.
Thes
e re
sults
are
con
sist
ent
with
the
fre
quen
tly
empl
oyed
ass
umpt
ions
in th
e pu
blic
fin
ance
lite
ratu
re th
at c
apita
l is
high
ly m
obile
, but
labo
r is n
ot.
Und
er th
ese
cond
ition
s lab
or w
ill b
ear t
he b
urde
n of
labo
r tax
es, a
nd b
ear o
r
shar
e th
e bu
rden
of c
apita
l tax
es.
2
Page 78
I.In
trod
uctio
n
Taxe
s di
stor
t in
cent
ives
for
eco
nom
ic a
gent
s. C
orpo
rate
tax
es r
aise
the
cos
t of
capi
tal
for
the
busi
ness
ow
ner,
thus
red
ucin
g th
e de
man
d fo
r ca
pita
l. H
owev
er,
the
inci
denc
e of
the
corp
orat
e ta
x ne
ed n
ot fa
ll so
lely
on
capi
tal.
Low
er in
vest
men
t in
capi
tal
may
lead
to lo
wer
cap
ital p
er w
orke
r, lo
wer
wor
ker p
rodu
ctiv
ity, a
nd lo
wer
real
wag
es. 1
Sim
ilarly
, pe
rson
al i
ncom
e ta
xes
dist
ort
the
wor
k-le
isur
e de
cisi
on f
or w
orke
rs.
Hig
h
pers
onal
taxe
s m
ay d
isco
urag
e pa
rtici
patio
n in
the
labo
r mar
ket,
thus
redu
cing
the
supp
ly
of la
bor.
How
ever
, if l
abor
sup
ply
is s
uffic
ient
ly e
last
ic, w
orke
rs m
ay p
ass
on a
sha
re o
f
the
tax
to c
apita
l in
the
form
of
high
er w
ages
. Hen
ce b
oth
corp
orat
e ta
xes
and
pers
onal
inco
me
taxe
s may
aff
ect w
ages
, thr
ough
thei
r im
pact
on
labo
r.
Ther
e is
am
ple
evid
ence
link
ing
natio
nal c
orpo
rate
tax
rate
s to
inve
stm
ent l
evel
s.
Cum
min
s, H
asse
tt an
d H
ubba
rd (
1999
) ha
ve d
ocum
ente
d th
e ne
gativ
e co
rrel
atio
n
betw
een
effe
ctiv
em
argi
nal
corp
orat
e ta
x ra
tes
and
inve
stm
ent
acro
ss a
lar
ge p
anel
of
coun
tries
. If
inve
stm
ent a
nd c
apita
l for
mat
ion
are
a fu
nctio
n of
cor
pora
te ta
x ra
tes,
then
wor
ker p
rodu
ctiv
ity a
nd w
ages
may
be
as w
ell.
To
date
, thi
s lin
k ha
s not
bee
n th
e su
bjec
t
of d
etai
led
econ
omet
ric a
naly
sis.
This
pap
er f
ills
that
gap
in th
e lit
erat
ure,
and
exp
lore
s
the
rela
tions
hip
betw
een
corp
orat
e ta
x ra
tes a
nd w
age
rate
s.
Cap
ital
taxa
tion
does
not
occ
ur i
n a
vacu
um.
Acc
ordi
ngly
, it
is i
mpo
rtant
to
expl
ore
not o
nly
the
impa
ct o
f lev
els
of ta
x va
riabl
es, b
ut a
lso
the
impa
ct o
f rel
ativ
e ta
x
varia
bles
for c
ompe
ting
coun
tries
.
1 See
Aue
rbac
h(2
005)
for a
mor
e re
cent
ana
lysi
s of w
ho b
ears
the
burd
enof
the
corp
orat
e ta
x.
3
The
effe
ct o
f per
sona
l inc
ome
taxe
s on
wor
k ac
tivity
has
bee
n ex
tens
ivel
y st
udie
d
in th
e lit
erat
ure.
Dav
is a
nd H
enre
kson
(20
04),
amon
g ot
hers
, fin
d th
at h
ighe
r ta
x ra
tes
redu
ce w
ork
time
in t
he m
arke
t se
ctor
. How
ever
, the
re a
re n
o st
udie
s lin
king
per
sona
l
inco
me
tax
rate
s an
d w
age
rate
s. Ta
ken
in t
his
cont
ext,
our
pape
r fit
s in
to t
he l
arge
r
publ
ic fi
nanc
e lit
erat
ure
rela
ting
the
tax
on a
com
mod
ity to
its
pric
e. P
oter
ba (1
996)
and
Bes
ley
and
Ros
en (
1994
) ex
amin
e th
e im
pact
of
sale
s an
d lo
cal
taxe
s on
pric
es o
f
com
mod
ities
, in
orde
r to
anal
yze
how
muc
h of
the
pric
e in
crea
se d
ue to
the
tax
is a
ctua
lly
shift
ed t
o co
nsum
ers.
If r
etai
l pr
ices
ris
e by
exa
ctly
the
am
ount
of t
he t
ax,
ther
e is
evid
ence
of
full
tax
shift
ing.
Alo
ng t
he s
ame
lines
, w
e ai
m t
o st
udy
the
effe
ct o
f an
incr
ease
in la
bor i
ncom
e ta
xes
on th
e pr
ice
of la
bor,
and
whe
ther
ther
e is
any
evi
denc
e to
sugg
est t
hat t
ax in
crea
ses
are
shift
ed to
cap
ital t
hrou
gh h
ighe
r w
ages
, thu
s tra
nsfe
rrin
g
som
e of
the
burd
en fr
om la
bor t
o ca
pita
l.
Acc
ordi
ngly
, the
pap
er a
ddre
sses
two
mai
n qu
estio
ns: D
o ta
x ra
tes,
corp
orat
e an
d
pers
onal
inco
me,
sys
tem
atic
ally
aff
ect w
age
rate
s? A
re w
ages
in th
e do
mes
tic e
cono
my
affe
cted
by
taxe
s an
d w
ages
in
com
petin
g ec
onom
ies?
The
se q
uest
ions
are
add
ress
ed
usin
g a
sam
ple
of d
evel
opin
g an
d de
velo
ped
econ
omie
s. O
ur e
mpi
rical
res
ults
indi
cate
that
dom
estic
cor
pora
te ta
xes
are
nega
tivel
y an
d si
gnifi
cant
ly re
late
d to
wag
e ra
tes
acro
ss
coun
tries
. W
e al
so f
ind
that
hig
her
aver
age
wag
es i
n a
coun
try’s
nei
ghbo
rs l
eads
to
high
er d
omes
tic w
ages
. Fur
ther
, hig
h co
rpor
ate
taxe
s in
com
petin
g co
untri
es a
lso
lead
to
high
er d
omes
tic w
ages
. Ta
ken
toge
ther
, our
resu
lts s
ugge
st th
at c
apita
l mov
es fr
om h
igh
tax
to lo
w ta
x co
untri
es, a
nd a
ffec
ts w
ages
.
Our
resu
lts fo
r per
sona
l inc
ome
taxe
s ar
e su
rpris
ing.
We
find
that
tax
rate
s do
not
sign
ifica
ntly
impa
ct w
age
rate
s. Th
is is
con
sist
ent w
ith a
mod
el w
here
in n
o pa
rt of
the 4
Page 79
incr
ease
in
labo
r ta
xes
is p
asse
d on
to w
ages
. In
suc
h a
mod
el,
labo
r be
ars
the
entir
e
burd
en o
f the
tax.
Sect
ion
II p
rovi
des
a br
ief
theo
retic
al b
ackg
roun
d an
d lit
erat
ure
surv
ey. S
ectio
n
III
disc
usse
s th
e da
ta a
nd p
rese
nts
sum
mar
y st
atis
tics.
Sect
ion
IV d
iscu
sses
pre
limin
ary
regr
essi
on re
sults
. Sec
tion
V c
oncl
udes
.
II. T
he L
inka
ge B
etw
een
Cap
ital T
axat
ion
and
Wag
es
Sinc
e th
e th
eore
tical
lin
kage
bet
wee
n la
bor
taxe
s an
d th
e su
pply
of
labo
r (a
nd
henc
e w
age
rate
s) is
fairl
y st
raig
htfo
rwar
d, w
e w
ill fo
cus
the
disc
ussi
on in
this
sec
tion
on
capi
tal
taxe
s an
d w
ages
. Th
ere
are
man
yex
ant
e re
ason
s to
exp
ect
that
the
lin
kage
s
betw
een
capi
tal
taxa
tion
and
the
wel
fare
of
wor
kers
cou
ld b
e si
gnifi
cant
. Rel
ying
, for
exam
ple,
on
the
Solo
w m
odel
with
a C
obb-
Dou
glas
pro
duct
ion
func
tion
with
lab
or-
augm
entin
g te
chno
logy
:
Y =
F(K
,L)=
K (A
L) (1
-)
The
wag
e eq
uatio
n is
:
kA
LKA
LYw
11
)1(
)1(
whe
rek
is th
e ca
pita
l sto
ck p
er w
orke
r and
A is
the
leve
l of t
echn
olog
y. T
he m
ore
capi
tal
per
wor
ker
(the
grea
ter
the
valu
e of
k),
the
grea
ter
the
wag
e is
. Th
eref
ore,
a l
ower
corp
orat
e ta
x m
ay le
ad to
a la
rger
cap
itals
tock
, whi
ch m
ay b
enef
it th
ose
peop
le a
t the
low
er e
nd o
f the
inco
me
dist
ribut
ion,
who
onl
y ea
rn la
bor i
ncom
e.
5
The
effe
ct m
ight
be
imm
edia
te if
ther
e w
ere
no c
apita
l adj
ustm
ent c
osts
, but
thes
e
are
likel
y to
be
impo
rtant
in p
ract
ice.
It
is n
ot p
laus
ible
, how
ever
, tha
t eno
ugh
capi
tal
coul
d flo
w in
to a
cou
ntry
in a
sin
gle
year
to d
ram
atic
ally
alte
r th
e m
argi
nal p
rodu
ct o
f
labo
r, al
thou
gh th
e ef
fect
cou
ld b
e qu
ite la
rge
in a
ver
y sm
all a
nd u
ndev
elop
ed c
ount
ry.
Acc
ordi
ngly
, we
will
look
for t
hese
eff
ects
ove
r lon
ger t
ime
horiz
ons,
givi
ng th
e ca
pita
l
stoc
k tim
e to
adj
ust t
o th
e lo
wer
tax
rate
s.
Thes
e lin
kage
s can
, in
theo
ry, b
e qu
ite si
gnifi
cant
, and
can
lead
to c
ount
erin
tuiti
ve
resu
lts.
Man
kiw
(200
1), f
or e
xam
ple,
dev
elop
s a
sim
ple
mod
el w
here
in a
uni
on th
at c
an
dict
ator
ially
set
taxe
s on
cap
ital a
nd la
bor c
hoos
es o
ptim
ally
to s
et th
e ca
pita
l tax
to z
ero,
even
tho
ugh
its o
bjec
tive
is s
impl
y th
e m
axim
izat
ion
of w
ages
. In
Man
kiw
’s (
2001
)
mod
el, t
here
are
two
dist
inct
type
s of
age
nts:
wor
kers
and
cap
italis
ts, a
nd tw
o ty
pes
of
taxe
s: c
apita
l ta
xes
and
labo
r ta
xes.
Sinc
e w
orke
rs o
utnu
mbe
r ca
pita
lists
, an
d th
e
hypo
thes
ized
eco
nom
y is
a d
emoc
racy
, w
orke
rs e
ffec
tivel
y ge
t to
dic
tate
the
tax
on
capi
tal a
nd la
bor t
o m
axim
ize
thei
r ow
n w
elfa
re. M
anki
w s
how
s th
at e
ven
in th
is c
onte
xt
wor
kers
wou
ld o
ptim
ally
cho
ose
to s
et t
he c
apita
l ta
x to
zer
o. T
he i
ntui
tion
is t
hat
wor
kers
wou
ld b
e be
tter o
ff w
ith a
hig
her c
apita
l sto
ck, s
ince
that
wou
ld in
crea
se w
orke
r
prod
uctiv
ity a
nd f
eed
thro
ugh
to w
ages
. Th
e th
eore
tical
cas
e fo
r ze
ro c
apita
l ta
xes
is
expl
ored
in g
reat
det
ail i
n tw
o re
cent
revi
ews (
Aue
rbac
h an
d H
ines
, 200
1; Ju
dd 2
001)
.
Of c
ours
e, th
e lin
k w
ould
not
be
inte
rest
ing
if ca
pita
l flo
ws
wer
e un
resp
onsi
ve to
tax
varia
bles
, but
the
oppo
site
app
ears
to b
e th
e ca
se. I
ndee
d, a
s m
entio
ned
earli
er, t
here
are
num
erou
s st
udie
s lin
king
cor
pora
te ta
x ra
tes
to in
vest
men
t lev
els,
both
at a
dom
estic
and
at a
n in
tern
atio
nal l
evel
. The
em
piric
al li
tera
ture
dis
cuss
ed in
Has
sett
and
Hub
bard 6
Page 80
(200
2), h
as g
ener
ally
fou
nd th
at e
ffec
tive
mar
gina
l tax
rat
es s
igni
fican
tly im
pact
cap
ital
form
atio
n. In a
dditi
on,
rela
tive
treat
men
t ac
ross
cou
ntrie
s ch
ange
s si
gnifi
cant
ly o
ver
time.
Afte
r lar
ge re
duct
ions
in s
tatu
tory
cor
pora
te ta
x ra
tes
by Ir
elan
d, U
K a
nd U
SA in
the
mid
1980
’s,
othe
r O
ECD
cou
ntrie
s al
so c
ut t
heir
rate
s pe
rhap
s ou
t of
a c
once
rn t
hat
they
wou
ld lo
se in
vest
men
ts.2 T
he in
tern
atio
nal t
ax li
tera
ture
, rec
ently
sum
mar
ized
by
Gor
don
and
Hin
es (2
002)
and
Dev
ereu
x an
d G
riffit
hs (2
002)
find
s th
at m
obile
cap
ital m
ay o
ften
flow
to lo
w ta
x ju
risdi
ctio
ns. C
ross
-sec
tiona
l stu
dies
suc
h as
Gru
bert
and
Mut
ti (1
991)
and
Hin
es a
nd R
ice
(199
4) e
stim
ate
the
effe
ct o
f nat
iona
l tax
rate
s on
the
dist
ribut
ion
of
aggr
egat
e A
mer
ican
-ow
ned
prop
erty
, pl
ant
and
equi
pmen
t in
198
2. T
hey
repo
rt a
nega
tive
elas
ticity
with
res
pect
to
loca
l ta
x ra
tes.
If t
here
is
a dr
op i
n in
vest
men
t in
rela
tivel
y hi
gh-ta
x co
untri
es, t
his w
ould
redu
ce th
e am
ount
of c
apita
l ava
ilabl
e to
wor
kers
and
thus
red
uce
real
wag
es in
that
cou
ntry
. Hen
ce if
tax
com
petit
ion
is p
reva
lent
, the
n
inve
stm
ent m
ay n
ot o
nly
be in
fluen
ced
by th
e le
vel o
f rat
es b
ut a
lso
by re
lativ
e ra
tes.
To m
ove
to a
n em
piric
al m
odel
of w
ages
, one
nee
ds to
mod
el th
e lin
kage
bet
wee
n
spec
ific
corp
orat
e ta
x va
riabl
es a
nd c
apita
l fo
rmat
ion.
The
lite
ratu
re s
ugge
sts
that
mar
gina
l ta
x ra
tes
may
not
be
the
only
rel
evan
t va
riabl
e. C
orpo
rate
inc
ome
taxe
s m
ay
also
dis
tort
the
ince
ntiv
es f
or i
nter
natio
nal
inve
stm
ent
and
crea
te o
ppor
tuni
ties
for
inte
rnat
iona
l ta
x pl
anni
ng.
If f
irms
loca
te p
lant
s in
low
-tax
juris
dict
ions
, an
d pl
ant
loca
tion
is th
e de
cisi
on a
t the
mar
gin,
then
ave
rage
tax
rate
s m
ay p
lay
an im
porta
nt ro
le
in d
eter
min
ing
inte
rnat
iona
l ca
pita
l flo
ws,
and
wag
es.
Dev
ereu
x an
d G
riffit
hs (
1998
)
conc
lude
s th
at t
he e
ffec
tive
aver
age
tax
rate
pla
y an
im
porta
nt r
ole
in t
he c
hoic
e of
2 “C
orpo
rate
Inco
me
Tax
Rat
es: I
nter
natio
nal C
ompa
rison
s”, N
ovem
ber 2
005,
CB
O
7
inve
stm
ent
loca
tion
with
in E
urop
e. H
owev
er,
they
do
not
find
a si
gnifi
cant
rol
e fo
r
effe
ctiv
e m
argi
nal t
ax ra
tes.
Tabl
es 2
and
3 r
epor
t th
e to
p st
atut
ory
corp
orat
e ta
x ra
tes,
and
aver
age
hour
ly
wag
e ra
tes,
for a
sub
set o
f the
cou
ntrie
s in
our
sam
ple.
The
re is
con
side
rabl
e va
riatio
n in
corp
orat
e ta
x ra
tes
acro
ss c
ount
ries.
For e
xam
ple,
in 1
981,
Aus
tralia
had
a to
p co
rpor
ate
tax
rate
of
45 p
erce
nt, w
hile
Bol
ivia
’s h
ighe
st r
ate
was
30
perc
ent.
Als
o, th
ere
has
been
cons
ider
able
var
iatio
n in
cor
pora
te ta
x ra
tes
over
tim
e; c
orpo
rate
tax
rate
s ha
ve te
nded
to
decl
ine
over
the
last
twen
ty y
ears
. Fo
rins
tanc
e, a
mon
g th
e O
ECD
eco
nom
ies,
Aus
tralia
expe
rienc
ed a
dec
line
in c
orpo
rate
tax
rat
es f
rom
46
perc
ent
in 1
985
to 3
0 pe
rcen
t in
2001
. O
ver
the
sam
e pe
riod,
am
ong
non-
OEC
D e
cono
mie
s, C
hile
exp
erie
nced
a d
rop
from
46
perc
ent t
o 16
per
cent
. The
se m
ovem
ents
are
als
o ap
pare
nt in
eff
ectiv
e av
erag
e
and
effe
ctiv
e m
argi
nal t
ax ra
tes (
Figu
re 1
).3
At t
he s
ame
time,
ave
rage
hou
rly w
age
rate
s, w
hich
are
aff
ecte
d by
man
y th
ings
in a
dditi
on to
tax
rate
s, ha
ve g
ener
ally
incr
ease
d ov
er ti
me
for m
ost c
ount
ries
(Fig
ure
2).
In A
ustra
lia, t
he a
vera
ge d
olla
r wag
e pe
r hou
r wen
t up
by 1
7.5
perc
ent o
ver t
his
perio
d,
whi
le i
n C
hile
, th
e co
rres
pond
ing
incr
ease
was
18.
75 p
erce
nt.
Figu
re 2
als
o sh
ows
a
dow
nwar
d tre
nd in
ave
rage
per
sona
l inc
ome
tax
rate
s. Th
e de
clin
e ha
s be
en s
teep
er f
or
the
OEC
D e
cono
mie
s, bu
t the
OEC
D e
cono
mie
s, on
ave
rage
, exp
erie
nced
hig
her r
ates
of
pers
onal
taxa
tion
than
non
-OEC
D e
cono
mie
s.
To d
ate,
stu
dies
see
king
to
expl
ain
the
cros
s-co
untry
var
iatio
n in
wag
e gr
owth
have
not
focu
sed
on th
e ro
le o
f cap
ital t
axat
ion.
Rod
rik (1
999)
find
s th
at th
ere
is a
robu
st
3 An
effe
ctiv
em
argi
nal t
ax ra
te is
the
perc
enta
ge o
f the
inco
me
from
a m
argi
nal i
nves
tmen
t tha
t mus
t be
paid
as c
orpo
rate
inco
me
taxe
s. Th
ese
rate
s are
aff
ecte
d by
rule
s for
dep
reci
atio
n of
pro
duct
ive
asse
ts a
ndot
her f
eatu
reso
f the
tax
code
.
8
Page 81
and
stat
istic
ally
sig
nific
ant a
ssoc
iatio
n be
twee
n th
e ex
tent
of d
emoc
racy
and
the
leve
l of
man
ufac
turin
g w
ages
in
a
coun
try.
This
ho
lds
even
af
ter
cont
rolli
ng
for
labo
r
prod
uctiv
ity a
nd p
er c
apita
inc
omes
. Fr
eem
an a
nd O
sten
dorp
(20
00)
expl
ain
cros
s-
coun
try d
iffer
ence
s in
ter
ms
of t
he l
evel
of
gros
s do
mes
tic p
rodu
ct p
er c
apita
and
unio
niza
tion
and
wag
e se
tting
inst
itutio
ns. R
ama
(200
3) c
oncl
udes
that
in th
e sh
ort r
un,
wag
es fa
ll w
ith o
penn
ess
to tr
ade
and
rise
with
fore
ign
dire
ct in
vest
men
t, bu
t afte
r a fe
w
year
s th
e ef
fect
of
trade
on
wag
es i
s re
vers
ed.
At
a m
icro
lev
el,
the
wid
enin
g w
age
dist
ribut
ion
in th
e U
nite
d St
ates
has
bee
n ex
plai
ned
in te
rms
of d
e-un
ioni
zatio
n an
d th
e
eros
ion
of t
he r
eal
valu
e of
the
min
imum
wag
e (D
iNar
do, F
ortin
and
Lem
ieux
, 199
6).
Car
d, K
ram
arz
and
Lem
ieux
(19
96)
sim
ilarly
em
phas
ize
labo
r m
arke
t rig
iditi
es a
s
impo
rtant
fac
tors
. Kat
z (1
999)
poi
nts
to th
e in
crea
sing
use
of
com
pute
rs a
nd c
ompu
ter
base
d te
chno
logi
es a
s af
fect
ing
the
rela
tive
dem
and
for
skill
ed w
orke
rs,
and
wag
e
ineq
ualit
y.
Oth
er p
aper
s, su
ch a
s D
avis
and
Hen
reks
on (
2004
) st
udy
the
effe
ct o
f hi
gh
pers
onal
inco
me
tax
rate
s on
hou
rs w
orke
d in
the
mar
ket s
ecto
r an
d ot
her
labo
r m
arke
t
outc
omes
. So
me
pape
rs a
lso
stud
y th
e ef
fect
of
fore
ign
dire
ct i
nves
tmen
t on
wag
e
dete
rmin
atio
n in
a s
patia
l set
ting.
Fee
nstra
and
Han
son
(199
5) fi
nd th
at in
crea
sed
fore
ign
dire
ct in
vest
men
t in
Mex
ico,
just
acr
oss
the
US
bord
er, c
ause
d an
incr
ease
in th
e re
lativ
e
wag
es o
f sk
illed
wor
kers
, in
bot
h co
untri
es a
long
the
bor
der.
They
, ho
wev
er,
did
not
expl
icitl
y m
odel
or
estim
ate
this
rel
atio
nshi
p us
ing
regr
essi
on a
naly
sis
or s
patia
l
econ
omet
rics t
echn
ique
s.
III.
Dat
a an
d E
mpi
rica
l Mod
el
The
data
cov
er th
e pe
riod
1981
-200
3 an
d in
clud
e 72
cou
ntrie
s.
9
Our
bas
ic a
ppro
ach
is t
o fo
llow
Rod
rik (
1999
), bu
t to
inc
lude
tax
var
iabl
es a
s
wel
l.4 Tha
t is,
we
estim
ate
a fix
ed e
ffec
ts m
odel
with
the
(fiv
e ye
ar a
vera
ge) L
og w
age
rate
per
hou
r (in
man
ufac
turin
g) a
s th
e de
pend
ent
varia
ble,
and
beg
inni
ng o
f pe
riod
valu
es o
f oth
er v
aria
bles
such
as L
og C
orpo
rate
Tax
Rat
es, L
og V
alue
Add
ed (p
er w
orke
r
in m
anuf
actu
ring)
and
Log
con
sum
er p
rice
inde
x as
the
inde
pend
ent v
aria
bles
. We
also
incl
ude
fixed
yea
r ef
fect
s. Fo
llow
ing
Dev
ereu
x et
al.
(199
8) w
e pr
esen
t re
sults
with
diff
eren
t mea
sure
s of
the
corp
orat
e ta
x ra
tes,
such
as
the
top
natio
nal c
orpo
rate
tax
rate
,
the
effe
ctiv
e m
argi
nal a
nd th
e ef
fect
ive
aver
age
corp
orat
e ta
x ra
te. I
n ad
ditio
n, w
e pr
esen
t
resu
lts w
ith th
e sp
atia
l var
iabl
es in
clud
ed in
the
anal
ysis
, suc
h as
wei
ghte
d av
erag
e ta
x
rate
s and
wei
ghte
d av
erag
e w
age
rate
s. Th
ese
capt
ure
the
effe
ct o
f spa
tial t
ax c
ompe
titio
n
and
spat
ial w
age
effe
cts a
cros
s cou
ntrie
s.
The
depe
nden
t var
iabl
e in
the
empi
rical
ana
lysi
s is t
he a
vera
ge d
olla
r wag
e ea
rned
in m
anuf
actu
ring
per
hour
. Th
e m
ain
sour
ce o
f da
ta o
n w
ages
is
the
Labo
r St
atis
tics
data
base
ava
ilabl
e fr
om t
he I
nter
natio
nal
Labo
r O
rgan
izat
ion
(http
://la
bors
ta.il
o.or
g/).
This
sour
ce p
rovi
des i
nfor
mat
ion
on w
ages
for a
bro
ad sa
mpl
e of
cou
ntrie
s, fo
r the
per
iod
1981
-200
3. T
hese
fig
ures
are
pro
vide
d in
loc
al c
urre
ncy
term
s an
d w
e ha
ve c
onve
rted
them
to
US
dolla
rs u
sing
exc
hang
e ra
tes
prov
ided
by
the
Penn
Wor
ld T
able
s. Th
e
depe
nden
t dat
a ar
e th
eref
ore
in n
omin
al te
rms,
alth
ough
a p
rice
defla
tor i
s al
so in
clud
ed
in th
e re
gres
sion
. Th
at is
, we
take
a s
peci
ficat
ion
for
the
real
wag
e, a
nd r
earr
ange
it s
o
that
the
defla
tor i
s an
exp
lana
tory
var
iabl
e. T
his
spec
ifica
tion
follo
ws
Rod
rik. 5 W
e tri
ed
spec
ifica
tions
with
the
real
wag
e as
the
depe
nden
t var
iabl
e i.e
the
nom
inal
wag
e de
flate
d
by th
e C
PI. R
esul
ts w
ere
sim
ilar.
4 We
disc
ussl
ater
why
we
do n
ot in
clud
e de
moc
racy
as a
nex
plan
ator
y va
riabl
e,w
hich
Rod
rik (1
999)
doe
s. 10
Page 82
Inte
rnat
iona
l co
mpa
rabi
lity
of t
he d
ata
is m
ade
poss
ible
thr
ough
use
of
vario
us
cont
rols
for
diff
eren
ces
in c
over
age
and
defin
ition
s. In
mos
t cou
ntrie
s, th
e st
atis
tics
on
wag
es re
fer t
o “w
ages
and
sal
arie
s” w
hich
incl
ude
dire
ct w
ages
and
sal
arie
s, bo
nuse
s an
d
grat
uitie
s, et
c w
here
as in
som
e co
untri
es th
ey r
efer
to “
earn
ings
”, w
hich
incl
ude,
mor
e
broa
dly,
all
com
pens
atio
n su
ch a
s em
ploy
ers’
con
tribu
tion
to s
ocia
l sec
urity
, pen
sion
and
insu
ranc
e sc
hem
es.
We
then
con
verte
d th
ese
tota
l w
age
paym
ents
to
hour
ly w
age
paym
ents
by
divi
ding
by
the
tota
l nu
mbe
rof
hou
rs w
orke
d, d
ata
for
whi
ch w
as a
gain
obta
ined
fro
m th
e IL
O. W
e ch
eck
for
the
robu
stne
ss o
f em
piric
al r
esul
ts w
hen
cont
rols
for d
iffer
ence
s in
cov
erag
e ar
e in
clud
ed. T
he d
ata
are
disc
usse
d in
det
ail i
n th
e ap
pend
ix.
Ave
rage
wag
es h
ave
been
risi
ng o
ver t
he p
erio
d 19
81-2
003
for a
ll co
untri
es, t
houg
h th
ere
is w
ide
varia
tion
in c
ount
ries b
oth
cros
s-se
ctio
nally
and
ove
r tim
e.
The
othe
r key
var
iabl
es in
this
pap
er a
re th
e ta
x ra
te v
aria
bles
. For
thes
e w
e dr
aw
on a
new
sou
rce,
the
AEI
Int
erna
tiona
l Ta
x D
atab
ase.
Fro
m t
he r
aw t
ax r
ates
, w
e
calc
ulat
e th
ree
mea
sure
s of
cor
pora
te t
ax r
ates
: to
p na
tiona
l ta
x ra
te, e
ffec
tive
aver
age
and
effe
ctiv
e m
argi
nal t
ax ra
tes.
Thei
r der
ivat
ion
follo
ws
Dev
ereu
x an
d G
riffit
hs (1
999)
.
We
cont
rol
for
diff
eren
ce i
n in
com
e ta
xatio
n as
wel
l. To
do
this
, we
use
aver
age
and
med
ian
pers
onal
inc
ome
tax
rate
s fr
om t
he A
EI I
nter
natio
nal
Tax
Dat
abas
e.6
The
tax
data
base
has
info
rmat
ion
on th
e nu
mbe
r of t
ax b
rack
ets a
nd th
e co
rres
pond
ing
tax
rate
for
each
cou
ntry
. We
cons
truct
ed a
vera
gean
d m
edia
n ta
x ra
tes u
sing
thes
e.
Oth
er v
aria
bles
incl
ude
the
valu
e ad
ded
per
wor
ker
(in m
anuf
actu
ring,
con
stan
t
1990
dol
lars
) and
trad
e as
a fr
actio
n of
GD
P (a
vaila
ble
from
the
ILO
KIL
M d
atab
ase)
to
mea
sure
ope
nnes
s. To
con
trol f
or th
e ef
fect
of p
rices
, we
incl
ude
the
log
of th
e co
nsum
er
pric
e in
dex.
Thi
s va
riabl
e ca
ptur
es c
ost-o
f-liv
ing
diff
eren
ces
not
capt
ured
by
exch
ange
6 Acc
ess t
o th
eA
EI In
tern
atio
nal T
axD
atab
ase
can
be p
rovi
ded
by w
ritin
gto
the
auth
ors.
11
rate
con
vers
ions
. W
e al
so e
xper
imen
t w
ith a
dditi
onal
var
iabl
es s
uch
as t
he l
evel
of
scho
olin
g, c
ompu
teriz
atio
n an
d ur
bani
zatio
n, h
ighl
ight
ed b
y ot
her p
aper
s in
the
liter
atur
e.
To a
llow
for t
he e
ffec
t of l
abor
mar
ket i
nstit
utio
ns, w
e us
e tw
o va
riabl
es. O
ne o
f
thes
e m
easu
res
the
perc
enta
ge o
f w
orke
rs in
a c
ount
ry c
over
ed b
y co
llect
ive
barg
aini
ng
agre
emen
ts, a
s a
perc
ent o
f tot
al s
alar
ied
or d
epen
dent
wor
kers
. The
sec
ond
is a
bro
ader
mea
sure
whi
ch is
a c
ount
of
the
cum
ulat
ive
num
ber
of I
LO c
onve
ntio
ns r
atifi
ed b
y th
e
coun
try. T
he I
LO c
onve
ntio
ns in
clud
e ra
tific
atio
n of
con
vent
ions
on
child
labo
r, fo
rced
or c
ompu
lsor
y la
bor,
disc
rimin
atio
n, t
he r
ight
to
orga
nize
and
the
rig
ht t
o ba
rgai
n
colle
ctiv
ely.
Thu
s th
e gr
eate
r th
e nu
mbe
r of
rat
ified
con
vent
ions
, th
e gr
eate
r th
e
prot
ectio
n of
wor
kers
rig
hts.
Info
rmat
ion
on th
ese
varia
bles
is a
vaila
ble
from
the
Fras
er
Inst
itute
’s E
cono
mic
Fre
edom
of
the
Wor
ldda
tase
t and
the
Wor
ld B
ank
Labo
r M
arke
t
Dat
abas
e (W
BLM
D),
(Ram
a, 1
996)
, res
pect
ivel
y.
Follo
win
g R
odrik
(199
9), i
deal
ly w
e w
ould
like
to in
clud
e bo
th th
e le
vel o
f gro
ss
dom
estic
pr
oduc
t (G
DP)
pe
r ca
pita
(a
vaila
ble
from
Pe
nn
Wor
ld
Tabl
es)
and
man
ufac
turin
g V
alue
Add
ed (M
VA
) per
wor
ker (
cons
tant
dol
lars
) in
the
sam
e re
gres
sion
.
In c
ase
all c
hang
es in
pro
duct
ivity
are
not
cap
ture
d by
MV
A, s
ome
shou
ld s
how
in th
e
estim
ated
coe
ffic
ient
on
aggr
egat
e G
DP.
How
ever
, our
mea
sure
of
MV
A i
s no
isy.
We
obta
ined
MV
A d
ata
from
thr
ee s
ourc
es:
Key
Ind
icat
ors
of t
he L
abor
Mar
ket
(ILO
),
WB
LMD
(Ram
a, 1
996)
and
UN
IDO
. The
pro
blem
we
face
d w
as o
ne o
f mis
sing
dat
a fo
r
our s
ampl
e of
cou
ntrie
s and
yea
rs. T
he IL
O d
atab
ase
has m
ore
info
rmat
ion
on to
tal V
alue
Add
ed a
cros
s al
l se
ctor
s, ra
ther
tha
n V
alue
Add
ed o
nly
in M
anuf
actu
ring.
The
Wor
ld
Ban
k da
taba
se p
rovi
ded
info
rmat
ion
for
sele
cted
cou
ntrie
s on
ly u
ptil
1993
, w
hile
the
12
Page 83
UN
IDO
dat
abas
e ag
ain
had
lots
of m
issi
ng v
alue
s fo
r the
cou
ntrie
s in
our
sam
ple.
7 Thu
s
our b
est o
ptio
n w
as to
use
the
ILO
tota
l Val
ue A
dded
dat
a as
a p
roxy
for M
VA
. For
the
coun
tries
that
do
repo
rt M
VA
, we
have
incl
uded
that
dat
a. T
he c
orre
latio
n be
twee
n th
is
varia
ble
and
the
GD
P va
riabl
e is
hig
h, a
bove
0.7
0. H
ence
whi
le w
e ge
t sim
ilar
resu
lts
with
the
tw
o va
riabl
es,
we
repo
rt re
sults
usi
ng t
he V
alue
Add
ed v
aria
ble
to m
easu
re
prod
uctiv
ity.8
Fina
lly, w
e in
clud
e in
the
regr
essi
on a
naly
sis
wei
ghte
d av
erag
es o
f ta
x ra
tes
and
wag
e ra
tes
in c
ompe
ting
coun
tries
, fol
low
ing
the
stan
dard
spa
tial r
egre
ssio
n lit
erat
ure
as
sum
mar
ized
by
A
nsel
in
(199
9).
The
spat
ial
wei
ghts
m
atrix
ta
kes
the
form
,
Wt=
[W' 1t
.,……
…..,
W' Nt
.]'. A
t any
tim
e t,
the
ith ro
w o
f thi
s m
atrix
is g
iven
by
Wit,
whi
ch
spec
ifies
“ne
ighb
orho
od s
ets”
for
eac
h ob
serv
atio
n i.
The
ij-th
ele
men
t of
Wt,
nam
ely,
wij,
t, is
pos
itive
ifj i
s a
“nei
ghbo
r” o
f i, a
nd is
zer
o ot
herw
ise.
In o
ur m
odel
, we
cons
ider
man
y fo
rms
of th
e w
eigh
ting
mat
rix. O
ne is
bas
ed o
n re
gion
al e
cono
mic
wei
ghts
. In
this
,
the
coun
tries
are
ass
igne
d to
be
“nei
ghbo
rs”
if th
ey a
re in
the
sam
e re
gion
as
coun
try i.
For
exam
ple,
Zam
bia
wou
ld h
ave
as i
ts n
eigh
bors
, Zi
mba
bwe,
Mal
awi
and
Mau
ritiu
s
sinc
e th
ey a
re a
ll in
the
East
Afr
ican
regi
on, b
ut w
ould
not
incl
ude
Bol
ivia
, Aus
tralia
etc
sinc
e th
ey a
re in
oth
er re
gion
s. C
ount
ries
with
in th
e sa
me
regi
on w
ould
then
be
wei
ghte
d
by th
eir
GD
P. A
sec
ond
form
of
the
wei
ghtin
g m
atrix
is b
ased
on
Inco
me
wei
ghts
i.e.
coun
tries
with
in t
he s
ame
inco
me
grou
p, s
uch
as h
igh
inco
me,
low
inc
ome,
or
uppe
r
7 Rod
rik
(199
9)us
es
two
sam
ples
. Th
e B
LS
sam
ple
cove
rs
the
perio
d19
75-1
994,
whi
le
the
WB
LMD
/UN
IDO
sam
ple
cove
rs th
e pe
riod
1960
-199
4. T
here
fore
he
does
not
face
a s
imila
r pro
blem
. The
num
ber
ofob
serv
atio
ns i
n th
e U
NID
Oda
ta f
or o
ur s
ampl
e is
754
, in
WB
LMD
, 725
and
in
ILO
1305
.Ev
en t
houg
h th
e sa
mpl
e si
ze d
rops
by a
lot
whe
n w
e co
nsid
er t
he U
NID
O d
ata
(afte
r ta
king
fiv
e ye
arav
erag
es a
nd i
nclu
ding
othe
r va
riabl
es i
n th
e re
gres
sion)
, it
is c
omfo
rting
to
note
tha
t w
e ar
e ab
leto
repr
oduc
e ou
r mai
nre
sults
dis
cuss
edla
ter.
8 The
coe
ffic
ient
on
corp
orat
e ta
xes i
s neg
ativ
e an
d si
gnifi
cant
, eve
n w
hen
we
incl
ude
both
GD
P an
d M
VA
in th
e an
alys
is. A
lso,
if w
e us
e on
ly th
e co
untri
es w
ith m
anuf
actu
ring
valu
e ad
ded
data
in th
eIL
O sa
mpl
e,an
d us
e 3-
year
aver
ages
(to in
crea
se sa
mpl
e si
ze),
we
are
still
abl
e to
repr
oduc
e ou
r res
ults
.
13
mid
dle
inco
me
etc
are
clas
sifie
d as
nei
ghbo
rs. T
hese
cou
ntrie
s ar
e th
en w
eigh
ted
by th
eir
GD
P. T
he th
ird k
ind
of w
eigh
ting
we
used
was
to a
ssig
n di
stan
ce w
eigh
ts to
cou
ntrie
s
with
in th
e sa
me
inco
me
grou
p.
Thes
e w
eigh
ting
mat
rices
wer
e us
ed to
cre
ate
wei
ghte
d av
erag
es o
f cor
pora
te ta
x
rate
s an
d w
age
rate
s in
“ne
ighb
or”
coun
tries
. In
som
ewha
t mor
e de
tail,
the
ijth
elem
ent
of th
e w
eigh
ting
mat
rix a
t tim
et,
is,
kik
t
ijtijt
GD
P
GD
Pw
w
here
k is
the
num
ber o
f “ne
ighb
or”
coun
tries
for c
ount
ry i.
The
wei
ghtin
g m
atrix
bas
ed o
n di
stan
ce i
s de
fined
in
a si
mila
r m
anne
r. B
y
conv
entio
n, a
cro
ss s
ectio
nal u
nit i
s no
t a n
eigh
bor t
o its
elf,
so th
at th
e di
agon
al e
lem
ents
ofW
t are
all
zero
i.e
wii,
t=0.
B.
Sum
mar
y St
atis
tics
Sum
mar
y st
atis
tics
for
the
core
var
iabl
es a
re p
rese
nted
in T
able
1. T
he a
vera
ge
wag
e fo
r the
OEC
D e
cono
mie
s fo
r thi
s pe
riod
was
nea
rly $
9 pe
r hou
r, w
here
as fo
r Non
-
OEC
D e
cono
mie
s it
was
$2.
50. S
urpr
isin
gly,
how
ever
, the
mea
n to
p co
rpor
ate
tax
rate
was
sim
ilar-
arou
nd 3
5 pe
rcen
t-for
bot
h se
ts o
f cou
ntrie
s. A
vera
ge p
erso
nal i
ncom
e ta
xes
wer
e la
rger
for
the
OEC
D e
cono
mie
s (.3
1) t
han
for
the
non-
OEC
D e
cono
mie
s (.2
3).
Ave
rage
wag
es n
early
dou
bled
for
bot
h O
ECD
and
Non
-OEC
D e
cono
mie
s ov
er t
his
perio
d, a
nd c
orpo
rate
tax
rate
s de
clin
ed b
y sl
ight
ly le
ss th
an h
alf.
As
show
n in
Fig
ures
1
and
2, o
n av
erag
e fo
r al
l co
untri
es,
corp
orat
e an
d pe
rson
al i
ncom
e ta
xes
have
bee
n
decl
inin
g ov
er th
e sa
mpl
e pe
riod
1981
-200
3. T
his
is tr
ue f
or th
e to
p na
tiona
l cor
pora
te
tax
rate
, as w
ell a
s the
eff
ectiv
e m
argi
nal a
nd a
vera
ge ta
x ra
tes.
At t
he sa
me
time,
ave
rage
hour
ly w
age
rate
s ha
ve b
een
risin
g ov
er t
ime.
The
ave
rage
cor
pora
te t
ax r
ate
for
all
14
Page 84
coun
tries
wen
t do
wn
from
42
perc
ent
in 1
981
to a
roun
d 29
per
cent
in
2000
.9 For
the
sam
e pe
riod,
ave
rage
wag
e ra
tes i
ncre
ased
from
3.5
dol
lars
per
hou
r to
6 do
llars
per
hou
r.
The
corr
elat
ion
betw
een
thes
e tw
o va
riabl
es w
as la
rger
for
the
OEC
D c
ount
ries
(.355
)
than
for
the
non-
OEC
D c
ount
ries.
This
is a
lso
refle
cted
in th
e la
rge
nega
tive
coef
ficie
nt
on ta
x ra
tes i
n a
regr
essi
on o
f tax
rate
s on
aver
age
wag
es fo
r OEC
D c
ount
ries (
Figu
re 3
).
IV. R
egre
ssio
n R
esul
ts
For
purp
oses
of
th
e em
piric
al
anal
ysis
, w
e ha
ve
grou
ped
the
data
in
to
nono
verla
ppin
g fiv
e ye
ar p
erio
ds c
over
ing
five
sub-
perio
ds o
ver
1981
-200
2.10
The
aver
age
wag
e is
a f
ive
year
ave
rage
of
each
of
the
sub-
perio
ds. N
ote
that
the
ave
rage
wag
e is
in
nom
inal
dol
lar
term
s. T
his
is R
odrik
’s (
1999
) sp
ecifi
catio
n, b
ut w
ith t
ax
varia
ble
adde
d.11
For
the
right
han
d si
de v
aria
bles
, we
use
the
begi
nnin
g of
per
iod
valu
es.
Tabl
e 4
pres
ents
the
firs
t se
t of
reg
ress
ion
resu
lts.
All
the
regr
essi
ons,
unle
ss
othe
rwis
e st
ated
, ar
e es
timat
ed u
sing
fix
ed e
ffec
ts.
All
spec
ifica
tions
als
o co
ntro
l fo
r
perio
d (ti
me)
dum
mie
s. Th
e m
ain
varia
bles
of i
nter
est i
n th
is p
aper
are
the
corp
orat
e ta
x
rate
and
the
per
sona
l in
com
e ta
x ra
te.
Reg
ress
ions
in
Tabl
e 4
use
the
top
natio
nal
corp
orat
e ta
x ra
te a
s th
e ex
plan
ator
y va
riabl
e. R
esul
ts w
ith o
ther
mea
sure
s of
cor
pora
te
taxe
s, su
ch a
s eff
ectiv
e av
erag
e an
d m
argi
nal c
orpo
rate
tax
rate
s are
pre
sent
ed in
Tab
le 5
.
The
corp
orat
e ta
x ra
te v
aria
ble
is n
egat
ive
and
high
ly s
igni
fican
t. (p
=.00
5) in
the
wag
e
equa
tion.
Thi
s re
sult
is f
airly
sta
ble
acro
ss d
iffer
ent
spec
ifica
tions
, an
d de
clin
es i
n
9 The
cou
ntrie
swith
the
high
est c
orpo
rate
tax
rate
s wer
e B
elgi
um, I
taly
and
Tur
key,
with
rate
s clo
se to
40
perc
ent.
10 T
he su
b-pe
riods
are
1981
-198
5,19
86-1
990,
199
1-19
95,1
996-
2000
,200
1-20
0211
Rod
rik(1
999)
has
a s
peci
ficat
ion
with
log
nom
inal
wag
es a
s th
ede
pend
ent
varia
ble.
He,
how
ever
,ac
know
ledg
esth
e po
ssib
ility
of s
purio
us e
ffec
ts a
risin
gfr
om w
age
and
pric
e in
flatio
n. T
here
fore
, in
one
ofhi
s sp
ecifi
catio
ns
usin
gW
MB
LD/U
NID
O
data
, he
divi
des
the
nom
inal
w
age
per
hour
by
the
Man
ufac
turin
g V
alue
Add
ed (M
VA
)per
hour
, and
that
beco
mes
the
depe
nden
tvar
iabl
e.
15
sign
ifica
nce
only
mar
gina
lly w
hen
the
num
ber o
f obs
erva
tions
is re
duce
d in
col
umns
(4)-
(5).
The
poin
t es
timat
es s
ugge
st t
hat
a on
e pe
rcen
t in
crea
se i
n co
rpor
ate
tax
rate
s is
asso
ciat
ed w
ith n
early
a 0
.8 p
erce
nt d
ecre
ase
in w
age
rate
s ac
cord
ing
to th
e re
gres
sion
in
Col
umn
(1),
and
on a
vera
ge a
bout
0.9
5 pe
rcen
t dec
reas
e ac
ross
diff
eren
t spe
cific
atio
ns.
In F
igur
e 3
we
pres
ent s
catte
rplo
ts o
f cor
pora
te ta
x ra
tes
and
wag
e ra
tes
for O
ECD
and
Non
-OEC
D c
ount
ries.
In g
ener
al, c
ount
ries
with
hig
h ta
x ra
tes
tend
to h
ave
low
er w
ages
rate
s. A
reg
ress
ion
of a
vera
ge w
ages
on
corp
orat
e ta
x ra
tes
in d
iffer
ent s
ub-s
ampl
es o
f
OEC
D a
nd n
on-O
ECD
eco
nom
ies
yiel
ds a
larg
er s
lope
coe
ffic
ient
in th
e ca
se o
f OEC
D
coun
tries
, su
gges
ting
that
on
aver
age
over
thi
s pe
riod,
cap
ital-w
age
links
hav
e be
en
stro
nger
for t
he O
ECD
cou
ntrie
s.
In o
ur m
odel
, cor
pora
te ta
x ra
tes a
re a
ssum
ed to
aff
ect w
ages
thro
ugh
thei
r im
pact
on c
apita
l-lab
or ra
tios
(inve
stm
ent)
and
wor
ker p
rodu
ctiv
ity. T
o te
st fo
r thi
s, w
e ob
tain
ed
info
rmat
ion
on c
apita
l-lab
or ra
tios
(fro
m th
e Pe
nn W
orld
Tab
les)
, and
est
imat
ed a
2SL
S
regr
essi
on o
f av
erag
e w
ages
on
capi
tal l
abor
rat
ios
usin
g ta
xes
as in
stru
men
ts. T
he f
irst
stag
e re
gres
sion
of
capi
tal
labo
r ra
tios
on c
orpo
rate
tax
rat
es y
ield
ed a
neg
ativ
e an
d
sign
ifica
nt c
oeff
icie
nt o
n co
rpor
ate
tax
rate
s (p
=0.0
48).
In th
e se
cond
sta
ge r
egre
ssio
n,
the
coef
ficie
nt o
n ca
pita
l lab
or ra
tio is
pos
itive
and
sig
nific
ant a
t nea
rly 9
5 pe
rcen
t lev
el
of s
igni
fican
ce (t
-sta
tistic
=1.9
3), w
ith a
coe
ffic
ient
clo
se to
2. T
his
conf
irms
our i
ntui
tion
that
hig
her
corp
orat
e ta
xes
may
fee
d th
roug
h to
low
er w
ages
, th
roug
h lo
wer
cap
ital
inve
stm
ent p
er w
orke
r.
Perh
aps,
surp
risin
gly,
we
find
that
ave
rage
per
sona
l in
com
e ta
x ra
tes
are
insi
gnifi
cant
in
all
spec
ifica
tions
. Lab
or t
axes
do
not
syst
emat
ical
ly a
ffec
t w
ages
. Thi
s
resu
lt ho
lds
even
whe
n w
e dr
op o
ther
var
iabl
es, i
nclu
ding
the
cor
pora
te t
ax v
aria
bles
,
16
Page 85
from
the
reg
ress
ion
(Col
umn
(3))
. Th
is s
ugge
sts
that
lab
or b
ears
the
ent
ire b
urde
n of
labo
r ta
xes.
Ther
e is
no
shift
ing
of th
e ta
x to
cap
ital i
n th
e fo
rm o
f hi
gher
wag
es. T
his
resu
lt is
in li
ne w
ith D
avis
and
Hen
reks
on (2
004)
. The
y co
nclu
de th
at th
e m
anuf
actu
ring
sect
or is
rela
tivel
y in
sens
itive
to p
erso
nal t
ax ra
tes,
beca
use
man
ufac
turin
g pr
oduc
tion
is
high
ly c
apita
l int
ensi
ve, l
arge
r firm
s an
d es
tabl
ishm
ents
pre
dom
inat
e, a
nd th
e w
orkf
orce
is h
ighl
y sp
ecia
lized
. The
y fin
d in
cro
ss-c
ount
ry d
ata
a st
atis
tical
ly in
sign
ifica
nt e
ffec
t of
labo
r ta
x ra
tes
on m
anuf
actu
ring’
s sh
are
of t
otal
em
ploy
men
t. Th
us i
t is
lik
ely
that
man
ufac
turin
g w
ages
to
o ar
e un
resp
onsi
ve
to
pers
onal
ta
x ra
tes.
We
re-r
an
the
regr
essi
ons
usin
g m
edia
n pe
rson
al i
ncom
e ta
x ra
tes
as a
n al
tern
ativ
e m
easu
re o
f th
e
typi
cal i
ncom
e ta
x pa
id b
y th
e ty
pica
l man
ufac
turin
g em
ploy
ee, b
ut th
e re
sults
did
not
chan
ge. M
edia
n pe
rson
al ta
xes w
ere
insi
gnifi
cant
in a
ll sp
ecifi
catio
ns.12
The
regr
essi
ons
in c
olum
ns (
1)-(
5) a
lso
reve
al t
hat
MV
A p
er w
orke
r is
a
sign
ifica
nt d
eter
min
ant
of w
age
leve
ls.
Not
sur
pris
ingl
y, h
ighe
r la
bor
prod
uctiv
ity i
s
asso
ciat
ed w
ith h
ighe
r w
ages
. Whe
n Lo
g w
ages
are
reg
ress
ed o
n Lo
g V
alue
Add
ed p
er
wor
ker a
lone
, the
coe
ffic
ient
is s
igni
fican
t and
pos
itive
with
a c
oeff
icie
nt o
f 2.3
and
a t-
stat
istic
of
17.7
4. I
f in
stea
d of
MV
A p
er w
orke
r w
e su
bstit
ute
Log
(GD
P pe
r ca
pita
) in
the
regr
essi
on in
Col
umn
(1),
the
resu
lts a
re s
imila
r. Th
eref
ore,
we
do n
ot p
rese
nt th
em
sepa
rate
ly, a
nd o
ur a
naly
sis w
ill b
e en
tirel
y in
term
s of M
VA
per
wor
ker.13
We
test
ed f
or r
obus
tnes
s of
the
coef
ficie
nt o
n ta
x ra
tes,
by in
clud
ing
addi
tiona
l
varia
bles
. Th
ese
incl
ude
the
leve
l of
sch
oolin
g (m
easu
red
by e
nrol
lmen
t at
diff
eren
t
12 D
avis
and
Hen
reks
on (2
004)
stud
y th
e ef
fect
of l
abor
taxe
s on
subs
titut
ion
away
from
mar
ket a
ctiv
ities
tow
ards
non
-mar
ket a
ctiv
ities
with
in a
cou
ntry
. The
yfin
dth
at th
is k
ind
of su
bstit
utio
n is
muc
h lo
wer
in th
em
anuf
actu
ring
sect
or.
13 A
s men
tione
dbe
fore
,we
are
able
tore
prod
uce
thes
ere
sults
in th
e sm
alle
r UN
IDO
sam
ple
usin
g a
RE
GLS
mod
el a
nd a
sim
ple
OLS
regr
essi
onw
ith re
gion
dum
mie
s, bo
thof
whi
ch im
pose
few
erre
stric
tions
onth
ede
gree
s of f
reed
om.
17
leve
ls o
f sc
hool
ing,
suc
h as
prim
ary,
sec
onda
ry a
nd t
ertia
ry (
ILO
)),
labo
r m
arke
t
regu
latio
ns (a
s mea
sure
d by
the
num
ber o
f ILO
con
vent
ions
ratif
ied
by th
e co
untry
or t
he
perc
ent
of
wor
kers
co
vere
d by
co
llect
ive
barg
aini
ng
agre
emen
ts),
exte
nt
of
com
pute
rizat
ion
(mea
sure
d as
the
est
imat
ednu
mbe
r of
per
sona
l co
mpu
ters
in
use
as a
frac
tion
of th
e po
pula
tion,
ava
ilabl
e fr
om IL
O) a
nd o
penn
ess
(mea
sure
d by
sha
re o
f tot
al
trade
in G
DP)
. Non
e of
thes
e en
ters
sig
nific
antly
, sin
ce w
e co
ntro
l for
labo
r pro
duct
ivity
dire
ctly
.14 T
he e
stim
ated
coe
ffic
ient
on
corp
orat
e ta
x ra
tes
rem
ains
fai
rly s
imila
r ac
ross
diff
eren
t sp
ecifi
catio
ns,
and
is s
igni
fican
t at
eith
er t
he 9
5 or
99
perc
ent
leve
l of
sign
ifica
nce.
Not
e th
at t
he u
se o
f th
e fix
ed e
ffec
ts m
etho
dolo
gy e
limin
ates
cou
ntry
-
spec
ific
idio
sync
rasi
es re
gard
ing
the
type
of c
over
age
prov
ided
on
wag
es a
nd sa
larie
s.
In o
ther
reg
ress
ions
(no
t sho
wn
here
), w
e de
fined
the
depe
nden
t var
iabl
e as
the
real
wag
e, r
athe
r th
an t
he n
omin
al w
age.
Res
ults
wer
e si
mila
r. Th
e co
effic
ient
on
corp
orat
e ta
x ra
tes
was
in
the
sam
e ra
nge
as i
n ot
her
spec
ifica
tions
. Pe
rson
al t
axes
,
med
ian
and
aver
age,
wer
e no
t sig
nific
ant.
We
cont
rolle
d fo
r th
e ef
fect
of
cons
umer
pric
es. I
n ge
nera
l, hi
gher
pric
es m
ay
caus
e w
orke
rs to
bar
gain
for h
ighe
r wag
es. T
his
varia
ble
rem
ains
pos
itive
and
sig
nific
ant
in a
ll sp
ecifi
catio
ns.
We
also
exp
erim
ente
d w
ith o
ther
var
iabl
es s
uch
as t
he s
hare
of
gove
rnm
ent
ente
rpris
es i
n al
l en
terp
rises
, nu
mbe
r of
em
ploy
ees
in s
ervi
ce i
ndus
try o
r ag
ricul
ture
.
How
ever
, non
e of
the
se v
aria
bles
wer
e si
gnifi
cant
whi
le t
he s
ign
on t
he c
orpo
rate
tax
coef
ficie
nt c
ontin
ued
to b
e ne
gativ
e an
d si
gnifi
cant
.
14A
nO
LS r
egre
ssio
nof
ave
rage
wag
es o
n co
rpor
ate
taxe
s, sc
hool
ing
and
(trad
e/G
DP)
(co
ntro
lling
for
regi
onef
fect
s an
d tim
e du
mm
ies)
alo
ne y
ield
s si
gnifi
cant
and
posi
tive
coef
ficie
nts
on s
choo
ling
and
(trad
e/G
DP)
, whi
le s
till y
ield
ing
a ne
gativ
e an
d si
gnifi
cant
coe
ffic
ient
on
corp
orat
e ta
xes.
A re
gres
sion
ofav
erag
e w
ages
on
com
pute
rizat
ion
or n
umbe
rof
ILO
con
vent
ions
alo
ne y
ield
s a
posi
tive
and
stat
istic
ally
sign
ifica
nt im
pact
of t
hese
var
iabl
es.
18
Page 86
In T
able
5, w
e te
sted
to s
ee if
the
abov
e re
sults
car
ried
over
to o
ther
mea
sure
s of
the
corp
orat
e ta
x ra
te, s
uch
as th
e Ef
fect
ive
Mar
gina
l Tax
Rat
e an
d th
e Ef
fect
ive
Ave
rage
Tax
Rat
e. T
he c
oeff
icie
nt o
n th
e ef
fect
ive
mar
gina
l ta
x ra
te v
aria
ble
is n
egat
ive
and
sign
ifica
nt o
nly
at 9
0 pe
rcen
t lev
el o
f sig
nific
ance
in C
olum
n (1
), w
hile
on
the
effe
ctiv
e
aver
age
tax
rate
var
iabl
e is
sig
nific
ant
at 9
5 pe
rcen
t. In
Col
umns
(3)
and
(4)
we
have
pres
ente
d th
ese
resu
lts
for
the
case
whe
n ou
r sa
mpl
e in
clud
es
only
no
n-O
ECD
econ
omie
s. In
thi
s ca
se,
we
do f
ind
that
eff
ectiv
e av
erag
e ta
xes
mat
ter
mor
e th
an
effe
ctiv
e m
argi
nal t
ax r
ates
. Thi
s su
ppor
ts w
eakl
y th
e re
sults
of
Dev
ereu
x an
d G
riffit
hs
(199
8) a
nd H
asse
tt an
d H
ubba
rd (
2002
) of
the
im
pact
of
tax
rate
s on
inv
estm
ent
for
effe
ctiv
e av
erag
e an
d m
argi
nal t
ax ra
tes,
resp
ectiv
ely.
Res
ults
for t
he o
ther
var
iabl
es a
re
sim
ilar t
o th
ose
in T
able
4.
Tabl
e 6
inco
rpor
ates
mea
sure
s of
ave
rage
tax
rat
es a
nd a
vera
ge w
age
rate
s in
“nei
ghbo
r” c
ount
ries
in th
e re
gres
sion
ana
lysi
s. Th
e do
mes
tic e
cono
my
corp
orat
e ta
x ra
te
varia
bles
con
tinue
to b
e si
gnifi
cant
in th
ese
spec
ifica
tions
. Sin
ce p
erso
nal t
axes
are
foun
d
to b
e in
sign
ifica
nt i
n al
l sp
ecifi
catio
ns,
we
do n
ot i
nclu
de t
hem
in
the
spec
ifica
tions
show
n in
Tab
le 6
. In
tere
stin
gly,
we
find
sign
ifica
nt r
esul
ts f
or t
he s
patia
l va
riabl
es.
Col
umn
(1)
defin
es a
wei
ghte
d av
erag
e of
top
cor
pora
te t
ax r
ates
and
wag
e ra
tes
in
“nei
ghbo
r” c
ount
ries.
“Nei
ghbo
r” c
ount
ries h
ere
are
defin
ed a
s all
thos
e co
untri
es th
at a
re
in th
e sa
me
regi
on, a
s de
scrib
ed b
efor
e. T
he w
eigh
ts th
at w
e us
e fo
r th
ese
coun
tries
are
GD
P w
eigh
ts. T
hus
ever
y co
untry
is w
eigh
ted
by it
s ec
onom
ic s
treng
th in
the
regi
on. I
n
this
spe
cific
atio
n, th
e w
eigh
ted
aver
age
wag
e in
the
regi
on tu
rns
out t
o be
pos
itive
and
sign
ifica
nt. T
here
cou
ld b
e at
leas
t tw
o re
ason
s fo
r th
is r
esul
t. A
n in
crea
se in
wag
es in
neig
hbor
ing
coun
tries
may
incr
ease
cap
ital o
utflo
w fr
om th
ese
regi
ons t
o re
lativ
ely
low
er 19
wag
e ne
ighb
or c
ount
ries,
whi
ch in
turn
may
incr
ease
the
dem
and
for l
abor
, and
hen
ce th
e
wag
e ra
te. S
econ
dly,
hig
h w
ages
in n
eigh
borin
g co
untri
es m
ayca
use
wor
kers
to m
ove
to
the
high
wag
e co
untry
. Thi
s wou
ld c
ause
a d
ecre
ase
in su
pply
of w
orke
rs in
the
rela
tivel
y
low
wag
e co
untry
, whi
ch c
ould
cau
se a
n in
crea
se in
wag
es in
the
low
wag
e co
untry
as
wel
l. Fo
r the
wei
ghte
d av
erag
e ta
x ra
te, t
he c
oeff
icie
nt is
pos
itive
,but
not
sign
ifica
nt.
In C
olum
n (2
), w
e ch
ange
the
spa
tial
neig
hbor
s by
def
inin
g as
nei
ghbo
rs t
hose
coun
tries
that
are
in th
e sa
me
inco
me
grou
p (r
athe
r th
an in
the
sam
e re
gion
). C
ount
ries
with
in t
he s
ame
inco
me
grou
p ar
e th
en w
eigh
ted
by t
heir
resp
ectiv
e G
DP.
Thi
s
spec
ifica
tion
wou
ld b
e ju
stifi
ed i
f w
orke
rs a
re m
ore
likel
y to
mov
e be
twee
n co
untri
es
with
the
sam
e pe
r ca
pita
inco
me
than
fro
m v
ery
high
to v
ery
low
or
vice
-ver
sa. I
n th
is
spec
ifica
tion,
the
wei
ghte
d w
age
varia
ble
is a
gain
pos
itive
and
sig
nific
ant.
In th
is c
ase,
the
wei
ghte
d (to
p co
rpor
ate)
tax
varia
ble
is p
ositi
ve, b
ut n
ot si
gnifi
cant
.15
Col
umn
(3)
pres
ents
res
ults
with
a d
iffer
ent w
eigh
ting
sche
me.
Whi
le n
eigh
bors
cont
inue
to b
e de
fined
in te
rms
of in
com
egr
oups
, the
cou
ntrie
s w
ithin
the
grou
p ar
e no
w
wei
ghte
d us
ing
(inve
rse)
dis
tanc
e w
eigh
ts. T
hus
the
farth
er t
he c
ount
ry, t
he l
ower
the
wei
ght i
t rec
eive
s w
ithin
the
grou
p. I
n th
is s
peci
ficat
ion
both
the
own
regi
on w
age
and
the
own
regi
on (t
op c
orpo
rate
) tax
rate
s are
pos
itive
and
sign
ifica
nt.
Fina
lly,
in C
olum
n (4
), w
e re
-ran
the
reg
ress
ion
usin
g as
a m
easu
re o
f th
e
dom
estic
and
inte
rnat
iona
l tax
rat
es, t
he e
ffec
tive
mar
gina
l tax
rat
es, i
nste
ad o
f th
e to
p
corp
orat
e ta
x ra
tes.
In th
is s
peci
ficat
ion,
the
inco
me
wei
ghte
d ta
x ra
tes
are
posi
tive
and
15W
hile
we
use
begi
nnin
g of
perio
dva
lues
to e
nsur
e ex
ogen
eity
of r
ight
-han
d si
dere
gres
sors
,we
also
use
2SLS
est
imat
ion
to t
est
for
this
. It’s
poss
ible
tha
t be
ginn
ing
of p
erio
d av
erag
e ne
ighb
or w
ages
may
be
corr
elat
ed w
ith t
he l
eft-h
and
side
depe
nden
t va
riabl
e.W
e th
eref
ore
inst
rum
ent
for
this
var
iabl
ein
the
stan
dard
way
sug
gest
ed in
the
spat
ial e
cono
met
rics
liter
atur
e (A
nsel
in,1
999)
.If o
ur re
gres
sion
mod
elha
sY
as
the
depe
nden
tvar
iabl
e an
dX
,WX
and
WY
as
the
right
-han
d si
de re
gres
sors
,we
inst
rum
ent f
orW
Yus
ing
X, W
Xan
d W
2 X, w
here
W is
the
wei
ghtin
g m
atrix
.Res
ults
did
not c
hang
e in
the
2SLS
spec
ifica
tion. 20
Page 87
sign
ifica
nt a
t 90
perc
ent l
evel
of s
igni
fican
ce. I
n C
olum
n (5
), w
e us
e th
e G
DP-
wei
ghte
d
aver
age
of t
he e
ffec
tive
aver
age
tax
rate
s in
nei
ghbo
r co
untri
es t
o ca
ptur
e sp
atia
l ta
x
com
petit
ion.
Th
ese
resu
lts
sugg
est
that
ta
x co
mpe
titio
n ex
ists
am
ong
“nei
ghbo
r”
coun
tries
, whe
ther
we
cons
ider
the
top
corp
orat
e ta
x ra
te, e
ffec
tive
mar
gina
l tax
rate
s, or
effe
ctiv
e av
erag
e ta
x ra
tes.
Com
petit
ion
coul
d re
sult
from
bei
ng g
eogr
aphi
c ne
ighb
ors
i.e
coun
tries
with
in th
e sa
me
regi
on, o
r fro
m“e
cono
mic
” ne
ighb
ors
i.e c
ount
ries
in th
e sa
me
inco
me
grou
p.
Tabl
e 7
pres
ents
res
ults
with
the
dem
ocra
cy v
aria
ble
incl
uded
in R
odrik
(19
99),
and
othe
r for
ms
of ta
xes
such
as
VA
T an
d pa
yrol
l tax
es. F
ollo
win
g R
odrik
, we
cons
truct
our
mea
sure
of
dem
ocra
cy u
sing
Fre
edom
Hou
se’s
cla
ssifi
catio
n of
cou
ntrie
s ba
sed
on
polit
ical
rig
hts
and
civi
l lib
ertie
s.16 C
olum
n (1
) sh
ows
that
in a
reg
ress
ion
incl
udin
g th
e
dem
ocra
cy v
aria
ble,
alo
ng w
ith o
ur ta
x ra
te v
aria
ble,
the
coef
ficie
nt o
n th
e de
moc
racy
varia
ble
is in
sign
ifica
nt, w
hile
the
estim
ated
coe
ffic
ient
on
tax
rate
s and
MV
A p
er w
orke
r
cont
inue
to b
e si
gnifi
cant
as
befo
re. U
nlik
e R
odrik
(199
9), w
e do
not
incl
ude
dem
ocra
cy
as a
n ex
plan
ator
y va
riabl
e in
our
bas
elin
e sp
ecifi
catio
n si
nce
a va
riabl
e lik
e de
moc
racy
is
diff
icul
t to
mea
sure
, an
d is
hig
hly
likel
y to
be
corr
elat
ed w
ith o
ther
uno
bser
vabl
es i
n
cros
s-co
untry
reg
ress
ions
. Pe
rsso
n an
d Ta
belli
ni (
2005
) su
gges
t th
at d
emoc
raci
es a
re
corr
elat
ed w
ith o
ther
fea
ture
s of
the
eco
nom
ic s
yste
m, s
uch
as l
iber
aliz
atio
n an
d tra
de
open
ness
, for
m o
f gov
ernm
ent a
nd ty
pe o
f ele
ctor
al ru
le. A
VA
R a
naly
sis
of d
emoc
racy
and
corp
orat
e ta
x ra
tes s
ugge
sts t
hat d
emoc
racy
may
gra
nger
-cau
se c
orpo
rate
tax
rate
s. In
the
polit
ical
sc
ienc
e lit
erat
ure,
H
ays
(200
3),
finds
th
at
inte
rnat
iona
l ca
pita
l ta
x
com
petit
ion
has
the
grea
test
neg
ativ
e im
pact
in m
ajor
itaria
n de
moc
raci
es w
ith c
lose
d
16 F
reed
om H
ouse
rate
s cou
ntrie
s on
a sc
ale
of 1
to7
with
high
er ra
tings
sign
ifyin
g le
ss fr
eedo
m.W
eco
mbi
ne th
e tw
o ra
tings
into
a si
ngle
inde
xth
at v
arie
s fro
m 0
to 1
(with
high
er v
alue
s ind
icat
ing
grea
ter
dem
ocra
cy) b
y us
ing
the
trans
form
atio
n[(
14-c
ivill
ib-p
olrig
hts)
/12]
.
21
econ
omie
s. Th
e pa
per u
ses
a di
ffer
ent m
easu
re o
f dem
ocra
cy, a
nd d
istin
guis
hes
betw
een
maj
orita
rian
and
cons
ensu
s dem
ocra
cies
.
In C
olum
ns (2
) and
(3),
we
test
to se
e if
othe
r for
ms o
f tax
es, s
uch
as v
alue
-add
ed
or s
ales
tax
(VA
T) a
nd (e
mpl
oyer
and
em
ploy
ee) p
ayro
ll ta
xes
affe
ct a
vera
ge w
ages
, and
find
an i
nsig
nific
ant
effe
ct.
In C
olum
n (4
), w
e ad
dres
s th
e qu
estio
n w
heth
er s
ocia
l
secu
rity
cont
ribut
ions
by
empl
oyer
s m
ay b
e dr
ivin
g ou
r re
sults
on
pers
onal
taxe
s. Th
us
we
excl
ude
thos
e co
untri
es w
here
the
wag
e m
easu
re i
nclu
des
cont
ribut
ions
to
soci
al
secu
rity
by e
mpl
oyer
s. A
s w
e ca
n se
e fr
om th
e ta
ble,
this
doe
s no
t cha
nge
our
resu
lts.
Mor
eove
r, an
y di
ffer
ence
s in
the
defin
ition
of w
ages
acr
oss
coun
tries
wou
ld b
e ca
ptur
ed
by th
e fix
ed e
ffec
ts.
Tabl
e 8
pres
ents
res
ults
for
the
case
whe
n th
e la
rge
econ
omie
s (s
elec
ted
on th
e
basi
s of
GD
P) a
re e
xclu
ded
from
the
sam
ple.
The
intu
ition
for t
his
is th
at re
lativ
ely
smal
l
econ
omie
s ar
e m
uch
mor
e lik
ely
to e
xper
ienc
e a
sudd
en s
purt
in p
rodu
ctiv
ity a
nd w
ages
as a
res
ult
of i
ncre
ased
cap
ital
inve
stm
ent
as c
ompa
red
to t
he r
iche
r ec
onom
ies
have
capi
tal s
tock
s th
at a
re la
rge
rela
tive
to th
e w
orld
sup
ply
of in
vest
men
t. H
ence
we
shou
ld
expe
ct to
see
a la
rger
impa
ct o
f cap
ital t
axes
on
wag
es in
thes
e sm
all e
cono
mie
s, in
term
s
of a
lar
ger
size
est
imat
e of
the
coe
ffic
ient
on
tax
rate
s. Th
eref
ore
Col
umn
(1)
first
pres
ents
resu
lts w
ith th
e en
tire
sam
ple
whi
ch se
rves
as a
bas
is o
f com
paris
on. C
olum
n (2
)
pres
ents
res
ults
with
the
top
10
riche
st e
cono
mie
s ex
clud
ed f
rom
the
sam
ple.
As
we
pred
icte
d, th
e co
effic
ient
on
corp
orat
e ta
x ra
tes
incr
ease
s to
1.0
7 fr
om it
s va
lue
of 0
.84
in
Col
umn
(1).
Col
umn
(3)
focu
ses
spec
ifica
lly o
n th
e sm
all o
r po
or e
cono
mie
s. W
e re
-ran
the
regr
essi
on i
nclu
ding
onl
y th
e lo
wes
t G
DP
econ
omie
s in
the
sam
ple.
In
this
cas
e, t
he
22
Page 88
coef
ficie
nt o
n co
rpor
ate
tax
rate
s in
crea
ses
sign
ifica
ntly
to
1.54
. It
near
ly d
oubl
es i
n
mag
nitu
de c
ompa
red
to C
olum
n (1
). Th
ese
resu
lts su
gges
t tha
t at l
east
in th
e sh
ort-r
un (i
n
the
five
year
per
iod
used
in th
e sa
mpl
e) s
mal
ler e
cono
mie
s ar
e si
gnifi
cant
ly m
ore
likel
y
to re
spon
d to
cor
pora
te ta
x ra
tes
and
see
visi
ble
chan
ges
in p
rodu
ctiv
ity a
nd w
age
rate
s.
Larg
er e
cono
mie
s exp
erie
nce
the
gain
ove
r a lo
nger
tim
e pe
riod.
Fina
lly, a
Hau
sman
tes
t re
veal
ed n
o si
gnifi
cant
diff
eren
ces
in f
ixed
vs.
rand
om
effe
cts
estim
ates
. In
Tabl
e 9
we
pres
ent r
esul
ts u
sing
rand
om e
ffec
ts G
LS e
stim
atio
n an
d
OLS
est
imat
ion,
allo
win
g fo
r re
gion
dum
mie
sin
the
lat
ter
spec
ifica
tion.
Col
umn
(1)
pres
ents
the
ran
dom
eff
ects
est
imat
es.
The
coef
ficie
nt o
n to
p co
rpor
ate
tax
rate
is
nega
tive
and
high
ly s
igni
fican
t with
a t-
stat
istic
of 3
.55.
The
coe
ffic
ient
on
Val
ue a
dded
per w
orke
r in
man
ufac
turin
g is
pos
itive
and
sign
ifica
nt a
t 95
perc
ent l
evel
of s
igni
fican
ce.
The
coef
ficie
nt o
n Lo
g (C
PI)
is p
ositi
ve a
nd s
igni
fican
t, w
hile
that
on
pers
onal
taxe
s is
agai
n in
sign
ifica
nt.
Col
umn
(2)
finds
sim
ilar
resu
lts w
ith O
LS.
Som
e of
the
reg
ion
dum
mie
s ar
e si
gnifi
cant
. Col
umn
(3)
pres
ents
res
ults
usi
ng 3
yea
r av
erag
es o
f th
e w
age
rate
as t
he d
epen
dent
var
iabl
e. R
esul
ts a
re si
mila
r to
thos
e m
entio
ned
for t
he sp
ecifi
catio
n
in C
olum
ns (1
).
To s
umm
ariz
e, o
ur r
esul
ts i
ndic
ate
that
whi
le p
erso
nal
inco
me
tax
rate
s do
not
affe
ct w
ages
, cor
pora
te ta
xes
are
sign
ifica
ntly
rela
ted
to w
age
rate
s ac
ross
cou
ntrie
s. O
ur
coef
ficie
nt e
stim
ates
are
larg
e, ra
ngin
g fr
om 0
.83
to a
lmos
t 1-th
us a
1 p
erce
nt in
crea
se in
corp
orat
e ta
x ra
tes
lead
s to
an
alm
ost e
quiv
alen
t dec
reas
e in
wag
e ra
tes
(in p
erce
ntag
e
term
s). I
f w
e se
t all
varia
bles
to th
eir
aver
age
valu
es, a
n in
crea
se in
cor
pora
te ta
x ra
tes
from
a m
ean
valu
e of
.35
to a
1-s
tand
ard
devi
atio
n in
crea
se o
f .1
0, w
ould
cau
se w
age
rate
s to
dec
line
by m
ore
than
25
perc
ent
(dep
endi
ng o
n th
e re
gres
sion
spe
cific
atio
n).
23
Thus
a lo
w w
age-
high
tax
econ
omy,
like
Mex
ico
(ave
rage
wag
e ov
er th
e pe
riod=
$1.6
7
and
aver
age
tax
rate
=.37
), co
uld
rais
e w
age
leve
ls if
it c
ould
low
er it
’s c
orpo
rate
tax
rate
to th
at o
f C
anad
a’s
(.22)
. A 4
0 pe
rcen
t dro
p in
cor
pora
te ta
x ra
tes
coul
d ra
ise
wag
es b
y
near
ly 3
5 pe
rcen
t, up
to $
2.25
.
Thes
e re
sults
als
o ho
ld f
or e
ffec
tive
mar
gina
l an
d av
erag
e ta
x ra
tes.
The
coef
ficie
nt e
stim
ate
is (o
n av
erag
e) c
lose
to 0
.5, t
houg
h th
e le
vel o
f sig
nific
ance
is lo
wer
.
This
sug
gest
s th
at w
ages
are
as
likel
y to
be
influ
ence
d by
the
top
stat
utor
y co
rpor
ate
tax
rate
, as
by th
e ef
fect
ive
mar
gina
l and
ave
rage
tax
rate
s. H
ence
cor
pora
te ta
x cu
ts in
the
form
of
larg
e al
low
ance
s fo
r de
prec
iatio
n of
equ
ipm
ent
and
stru
ctur
es w
hich
red
uce
effe
ctiv
e m
argi
nal r
ates
cou
ld e
ffec
tivel
y in
fluen
ce w
age
leve
ls a
s wel
l.
We
find
evid
ence
of i
nter
natio
nal t
ax a
nd w
age
com
petit
ion
in th
e da
ta. C
ount
ry
wag
e ra
tes
are
affe
cted
not
onl
y by
dom
estic
tax
rate
s, bu
t als
o ta
x ra
tes
in c
ompe
ting
econ
omie
s. Th
e co
effic
ient
est
imat
es f
or th
e sp
atia
l wag
e an
d ta
x va
riabl
es r
ange
fro
m
0.39
to 0
.56
for
aver
age
neig
hbor
wag
es a
nd 0
.51
to 0
.55
for
the
aver
age
neig
hbor
tax
varia
ble,
sug
gest
ing
sign
ifica
nt q
uant
itativ
eim
pact
s. A
1 p
erce
nt i
ncre
ase
in w
ages
(taxe
s) in
com
petin
g co
untri
es c
ould
rai
se d
omes
tic w
ages
by
0.4
perc
ent (
0.5
perc
ent).
Com
parin
g di
ffer
ent
wei
ghtin
g sc
hem
es,
the
effe
cts
are
larg
est
whe
n “n
eigh
bors
” ar
e
defin
ed a
s co
untri
es w
ithin
the
sam
e in
com
e gr
oup,
rat
her
than
with
in th
e sa
me
regi
on.
This
sug
gest
s th
at t
ax c
ompe
titio
n is
mos
t in
tens
e am
ong,
say
, hi
gh i
ncom
e co
untri
es
such
as
Can
ada,
Fra
nce
and
Italy
, rat
her t
han
betw
een
geog
raph
ic n
eigh
bors
. Thi
s m
akes
sens
e in
tuiti
vely
sin
ce t
here
do
not
appe
ar t
o be
lar
ge t
rans
port
cost
s as
soci
ated
with
mov
ing
capi
tal a
cros
s la
rge
dist
ance
s, so
cap
ital c
an e
asily
flow
to th
e m
ost r
emun
erat
ive
loca
tions
.
24
Page 89
V. C
oncl
usio
n
The
resu
lts in
this
pap
er s
ugge
st th
at c
orpo
rate
tax
rate
s af
fect
wag
e le
vels
acr
oss
coun
tries
. Hig
her c
orpo
rate
taxe
s le
ad to
low
er w
ages
. A 1
per
cent
incr
ease
in c
orpo
rate
tax
rate
s is
ass
ocia
ted
with
nea
rly a
1 p
erce
ntdr
op in
wag
e ra
tes.
The
intu
ition
for
this
com
es f
rom
a s
impl
e an
alys
is o
f th
e So
low
mod
el th
at r
evea
ls th
at h
ighe
r ca
pita
l lab
or
ratio
s lea
d to
hig
her w
ages
, by
enha
ncin
g w
orke
r pro
duct
ivity
.
We
find
no e
ffec
t of
per
sona
l in
com
e ta
x ra
tes
on w
age
rate
s. Th
is c
ould
be
beca
use
we
are
focu
sing
on
man
ufac
turin
g w
ages
, an
d th
is s
ecto
r is
hig
hly
capi
tal
inte
nsiv
e an
d as
sug
gest
ed b
y ot
her a
utho
rs (D
avis
et a
l.200
4) u
nres
pons
ive
to ta
x ra
tes.
Thus
a p
ossi
ble
area
of e
xplo
ratio
n in
futu
re re
sear
ch is
to s
ee if
this
resu
lt ge
nera
lizes
to
othe
r sec
tors
.
We
find
evid
ence
for i
nter
natio
nal t
ax c
ompe
titio
n. In
par
ticul
ar, t
here
app
ears
to
be a
link
bet
wee
n hi
gh ta
x “n
eigh
bors
” an
d hi
gh d
omes
tic w
ages
. Pre
sum
ably
, as
capi
tal
flow
s ou
t of
hig
h ta
x “n
eigh
bor”
cou
ntrie
s to
low
tax
cou
ntrie
s, th
is i
ncre
ases
wor
ker
prod
uctiv
ity a
nd h
ence
wag
es, i
n th
e lo
w ta
x co
untry
. Thu
s co
untri
es tr
y to
com
pete
for
capi
tal
with
oth
er c
ount
ries
by l
ower
ing
thei
r re
lativ
e ta
x ra
tes.
We
also
fin
d st
rong
evid
ence
to s
ugge
st th
at h
igh
wag
es in
nei
ghbo
ring
coun
tries
lead
to h
igh
wag
es in
the
dom
estic
eco
nom
y. A
gain
, a p
ossi
ble
reas
on fo
r thi
s is
cap
ital f
light
. As
capi
tal m
oves
to
rela
tivel
y lo
w w
age
dest
inat
ions
, it i
ncre
ases
wor
ker p
rodu
ctiv
ity in
thes
e re
gion
s w
hich
in tu
rn, c
ause
s w
ages
to ri
se. T
he re
sults
for i
nter
natio
nal t
ax c
ompe
titio
n ar
e st
rong
est i
n
the
case
of c
ount
ries w
ithin
the
sam
e in
com
e gr
oup.
25
Ref
eren
ces
Ans
elin
c, L
. (19
99),
“Spa
tial E
cono
met
rics”
,
http
://w
ww
.csi
ss.o
rg/le
arni
ng_r
esou
rces
/con
tent
/pap
ers/
baltc
hap.
Aue
rbac
h, A
. (20
05),
“Who
Bea
rs t
he C
orpo
rate
Tax
?”,N
BER
Wor
king
Pap
er
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686
Aue
rbac
h, A
. and
Has
sett,
K. (
1991
), “R
ecen
t US
inve
stm
ent B
ehav
ior
and
The
Tax
Ref
orm
Act
of 1
986:
a d
isag
greg
ate
view
”, C
arne
gie
Roc
hest
er C
onfe
renc
e se
ries o
n
Publ
ic P
olic
y 35
: 185
-215
Aue
rbac
h, A
. an
d H
ines
, J.
(200
0),
“Tax
atio
n an
d Ec
onom
ic E
ffic
ienc
y”,
in
Han
dboo
k of
Pub
lic E
cono
mic
s, ed
ited
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lan
J. A
uerb
ach
and
Mar
tin F
elds
tein
.
Am
ster
dam
: Els
evie
r Pre
ss
Bes
ley,
Tim
othy
, and
Har
vey
Ros
en (1
994)
“Sal
es T
ax a
nd P
rices
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Empi
rical
Ana
lysi
s.” P
rince
ton
Uni
vers
ity E
cono
mic
s Dep
artm
ent.
Mim
eo
Car
d, D
., K
ram
arz,
F. a
nd L
emie
ux, T
. (19
96),
“Cha
nges
in th
e R
elat
ive
Stru
ctur
e
of W
ages
and
Em
ploy
men
t: A
Com
paris
on o
f th
e U
nite
d St
ates
, Can
ada
and
Fran
ce”,
NB
ER W
orki
ng P
aper
No.
5487
26
Page 90
Car
roll,
R.,
Hol
tz-E
akin
, D
. R
ider
, M
. an
d R
osen
, H
. (2
000)
, “E
ntre
pren
eurs
,
Inco
me
Taxe
s an
d In
vest
men
t”, i
n Jo
el S
lem
rod,
ed.
, Doe
s A
tlas
Shru
g? T
he E
cono
mic
Con
sequ
ence
s of T
axin
g th
e R
ich
(MIT
Pre
ss C
ambr
idge
) pp
427-
455
Cor
pora
te I
ncom
e Ta
x R
ates
: Int
erna
tiona
l Com
paris
ons,
CB
O, N
ovem
ber
2005
http
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ww
.cbo
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ocs/
69xx
/doc
6902
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28-C
orpo
rate
Tax.
Cum
min
s, J.G
., H
asse
tt, K
. an
d H
ubba
rd,
G.
(199
4),
“A R
econ
side
ratio
n of
Inve
stm
ent B
ehav
ior
usin
g Ta
x R
efor
ms
as N
atur
al E
xper
imen
ts”,
Bro
okin
gs P
aper
s on
Econ
omic
Act
ivity
2: 1
-74
Dav
is, S
and
Hen
reks
on, M
. (20
04),
“Tax
eff
ects
on
Wor
k A
ctiv
ity, I
ndus
try M
ix
and
Shad
ow E
cono
my
Size
: Ev
iden
ce f
rom
Ric
h-C
ount
ry C
ompa
rison
s”, P
ublis
hed
in
Labo
ur S
uppl
y an
d In
cent
ives
to
Wor
k in
Eur
ope,
Góm
ez-S
alva
dor,
R.,
Lam
o, A
.,
Petro
ngol
o,B
., W
ard,
M.,
Was
mer
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s.),
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apte
r 2,
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dwar
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ereu
x, M
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Grif
fith,
Rac
hel (
1998
), “T
he T
axat
ion
Of D
iscr
ete
Inve
stm
ent
Cho
ices
”, T
he In
stitu
te F
or F
isca
l Stu
dies
, Wor
king
Pap
er S
erie
s No.
W98
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Din
ardo
, J.,
Forti
n, N
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ieux
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abor
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ket I
nstit
utio
ns a
nd th
e
Dis
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tion
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ages
, 197
3-19
92: A
Sem
i-par
amet
ric A
ppro
ach”
, Eco
nom
etric
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XIV
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01-1
044.
27
Enge
n, E
, H
asse
tt, K
and
Met
calf,
G.
(200
3),
“Cap
ital
Taxa
tion
and
the
Rea
l
Econ
omy:
The
ory
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Evid
ence
”, W
orki
ng P
aper
.
Free
man
, R
. (1
994)
, A
Glo
bal
Labo
r M
arke
t? D
iffer
ence
s in
Wag
es A
mon
g
coun
trie
s in
the
1980
s, W
ashi
ngto
n D
.C, W
orld
Ban
k.
Free
man
, R. a
nd O
oste
ndor
p, R
. (20
00),
“Wag
es A
roun
d th
e W
orld
: Pay
Acr
oss
Occ
upat
ions
and
Cou
ntrie
s”, N
BER
WP
8058
.
Gor
don,
R. a
nd H
ines
, J. (
2002
), “I
nter
natio
nal T
axat
ion”
, NB
ER W
P88
54
http
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ww
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r.org
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ers/
w88
54.
Gru
bert,
H. a
nd M
utti,
J. (
1996
), “D
o Ta
xes
influ
ence
whe
re U
S m
ultin
atio
nal
corp
orat
ions
inve
st?”
Mim
eo, N
atio
nal T
ax Jo
urna
l, D
ecem
ber 2
000,
p. 8
25.
Gw
artn
ey,
J. an
d La
wso
n, R
. (2
005)
, Ec
onom
ic F
reed
om o
f th
e W
orld
: 20
05
Ann
ual
Rep
ort,
Van
couv
er:
The
Fras
er
Inst
itute
. D
ata
retri
eved
fr
om
ww
w.fr
eeth
ewor
ld.c
om.
Han
son,
G.
and
Feen
stra
, R
.(199
5),
“For
eign
Inv
estm
ent,
Out
sour
cing
and
Rel
ativ
eWag
es”,
in R
ober
t C. F
eens
tra, G
ene
M. G
ross
man
, and
Dou
glas
A. I
rwin
, eds
.,
Polit
ical
Eco
nom
y of
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de P
olic
y: E
ssay
s in
Hon
or o
f Jag
dish
Bha
gwat
i, M
IT P
ress
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89-1
27.
28
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Har
berg
er, A
. (19
62),
“The
Inci
denc
e of
the
Cor
pora
tion
Inco
me
Tax”
, Jou
rnal
of
Polit
ical
Eco
nom
y 70
(3),
p. 2
15-2
40.
Has
sett,
K.
and
Hub
bard
, G
. (2
002)
, “T
ax P
olic
y A
nd B
usin
ess
Inve
stm
ent”
,
Han
dboo
k of
Pub
lic E
cono
mic
s, V
ol 3
, Edi
ted
by A
. Aue
rbac
h an
d M
. Fe
ldst
ein.
Hay
s, J.
(200
3),
“Glo
baliz
atio
n an
d C
apita
l Ta
xatio
n in
C
onse
nsus
an
d
Maj
orita
rian
Dem
ocra
cies
”, W
orld
Pol
itics
, 56,
p. 7
9-11
3.
Hin
es, J
. (19
99),
“Les
sons
from
Beh
avio
ral R
espo
nses
to In
tern
atio
nal T
axat
ion”
,
Nat
iona
l Tax
Jour
nal,
Vol
.52
(2),p
. 305
-322
.
Hin
es, J
. and
Ric
e. E
.(199
4), “
Fisc
al P
arad
ise:
For
eign
Tax
Hav
ens a
nd A
mer
ican
Bus
ines
s.”Q
uart
erly
Jou
rnal
of E
cono
mic
s, vo
l. 10
9, n
o. 1
(Feb
ruar
y), 1
49-1
82.
Judd
, K. (
2001
),“T
he Im
pact
of T
ax R
efor
m in
Mod
ern
Dyn
amic
Eco
nom
ies.”
In
Tran
sitio
n Co
sts o
f Fun
dam
enta
l Tax
Ref
orm
, edi
ted
by K
. A. H
asse
tt an
d R
. G.H
ubba
rd.
Was
hing
ton,
D.C
.: A
EI.
Kat
z,
L.
(199
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“Tec
hnol
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Com
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e
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ctur
e”, H
arva
rd U
nive
rsity
.
Lin
k: h
ttp://
post
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nom
ics.h
arva
rd.e
du/fa
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Koe
ster
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nd K
orm
endi
, R. (
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Taxa
tion,
Agg
rega
te A
ctiv
ity a
nd
Econ
omic
Gro
wth
: Cro
ss-C
ount
ry E
vide
nce
on S
ome
Supp
ly-S
ide
Hyp
othe
ses”
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Econ
omic
Inqu
iry
27: 3
67–8
6.
Lee,
Y. a
nd G
ordo
n, R
. (20
05),
“Tax
Stru
ctur
e an
d Ec
onom
ic G
row
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Jour
nal o
f
Publ
ic E
cono
mic
s, V
ol 8
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sue
5-6,
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027-
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Pote
rba,
J. (
1996
), “R
etai
l Pr
ice
reac
tions
to
Cha
nges
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Stat
e an
d Lo
cal
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atio
nal T
ax Jo
urna
l Vol
.49,
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.
Ram
a, M
(Fa
ll 20
03),
“Glo
baliz
atio
n A
nd T
he L
abor
Mar
ket”
, The
Wor
ld B
ank
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earc
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bser
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9-18
6.
Ram
a, M
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996)
, “A
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or M
arke
t C
ross
-Cou
ntry
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ld B
ank,
Was
hing
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Man
kiw
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001)
, “C
omm
enta
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alan
ced-
Bud
get R
estra
int i
n Ta
Inco
me
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lth in
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sey
Mod
el”,
In In
equa
lity
and
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dite
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. Was
hing
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: AEI
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Rod
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es”,
Qua
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rnal
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ol. 1
14, N
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llini
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nd P
erss
on, T
orst
en (
2005
), “D
emoc
racy
and
Dev
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men
t: D
evil
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e D
etai
ls”,
http
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ww
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web
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mtg
_pap
ers/
2006
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6_10
15_1
402.
pdf .
Uni
ted
Nat
ions
Ind
ustri
al D
evel
opm
ent
Org
aniz
atio
n (U
NID
O),
Yea
rboo
k of
Labo
r Sta
tistic
s, va
rious
edi
tions
.
31
Tabl
e 1
Des
crip
tive
Stat
istic
s for
Cor
e V
aria
bles
use
d in
Reg
ress
ion
Var
iabl
eN
Mea
nSt
d.D
evA
vera
ge W
age
Per H
our
OEC
DN
on-O
ECD
1309
4.92
8.61
2.50
7.30
6.85
4.45
Log
(Ave
rage
W
age)
1309
.638
1.68
Top
Cor
pora
te
Tax
Rat
e O
ECD
Non
-OEC
D
1233
487
746
.35
.35
.34
.10
.89
.10
Log
Top
Cor
pora
te T
axR
ate
1230
-1.1
0.3
9
Log
Effe
ctiv
eA
vera
ge T
ax
Rat
e
1071
-1.2
4.3
4
Log
Effe
ctiv
eM
argi
nal t
ax
Rat
e
1048
-1.4
0.4
6
Ave
rage
Pers
onal
Inco
me
Tax
Rat
eO
ECD
Non
-OEC
D
1047
26.3
2
31.1
723
.22
9.90
8.68
9.37
Med
ian
Pers
onal
Inco
me
Tax
1145
27.1
510
.38
Log
(Val
ue
Add
ed P
er
Wor
ker i
nM
anuf
actu
ring)
1291
9.31
1.52
Log
GD
P pe
rca
pita
1449
8.14
1.33
Log
(Tra
de/G
DP)
1412
4.15
.52
Scho
olin
g11
903.
84.6
0Lo
g pr
ice
leve
l 16
064.
89.2
0
32
Page 93
Figure 1: Trends in Corporate Tax Rates
0.2
.4.6
Top
Nat
iona
l Cor
pora
te T
ax R
ate
('00)
1980 1985 1990 1995 2000Year
Trend in Top Corporate Tax Rates
A. Top National Corporate Tax Rate
0.2
.4.6
Effe
ctiv
e M
argi
nal C
orpo
rate
Tax
Rat
e ('0
0)
1980 1985 1990 1995 2000Year
Trend in Effective Marginal Tax Rates
B. Effective Marginal Tax Rate
33
Page 94
Figure 2:Wages and Income Taxes
010
2030
40Av
erag
e H
ourly
Wag
e R
ate
(dol
lars
)
1980 1985 1990 1995 2000Year
Trend in Hourly Wage Rates ($)
A. Trend in Average Hourly Wage Rates
020
4060
Aver
age
Per
sona
l Inc
ome
Tax
1980 1985 1990 1995 2000Year
Trend in Personal Income Taxes
B. Trend in Average Personal Income Tax Rates
34
Page 95
Figure 3: Capital Wage Links in OECD and Non-OECD Economies
010
2030
Hou
rly M
anuf
actu
ring
Wag
e (D
olla
rs)
0 .2 .4 .6Top Corporate Tax Rate('00)
Capital Wage Links in OECD economies
OECD: Slope coefficient=-25.76
010
2030
40H
ourly
Man
ufac
turin
g W
age
(Dol
lars
)
0 .2 .4 .6Top Corporate Tax Rate('00)
Capital Wage Links in non-OECD economies
Non-OECD: Slope coefficient =-5.88
35
Page 96
Table 2: Variation In Top Corporate Tax Rates (’00)
Australia Austria Bolivia Chile Colombia 1981 0.46 0.55 0.3 0.48 0.4 1982 0.46 0.55 0.3 0.48 0.4 1983 0.46 0.55 0.3 0.46 0.4 1984 0.46 0.55 0.3 0.23 0.4 1985 0.46 0.55 0.3 0.1 0.4 1986 0.49 0.55 0.02 0.1 0.4 1987 0.49 0.55 0.02 0.1 0.3 1988 0.39 0.55 0.02 0.1 0.3 1989 0.39 0.3 0.025 0.09 0.3 1990 0.39 0.3 0.03 0.15 0.3 1991 0.39 0.3 0.03 0.15 0.3 1992 0.39 0.3 0.03 0.15 0.3 1993 0.33 0.3 0.03 0.15 0.371994 0.33 0.34 0.25 0.15 0.371995 0.36 0.34 0.25 0.15 0.351996 0.36 0.34 0.25 0.15 0.351997 0.36 0.34 0.25 0.15 0.351998 0.36 0.34 0.25 0.15 0.351999 0.36 0.34 0.25 0.15 0.352000 0.34 0.34 0.25 0.15 0.352001 0.3 0.34 0.25 0.15 0.352002 0.3 0.34 0.25 0.16 0.35
36
Page 97
Tabl
e 3:
Var
iatio
n in
Wag
e R
ates
(US
$ pe
r hou
r)
Aus
tralia
Aus
tria
Bol
ivia
Chi
leC
olom
bia
1981
9.8
6.87
1.2
1.64
1.15
1982
8.12
6.86
1.09
1.43
1.29
1983
7.51
6.85
1.5
1.90
1.34
1984
7.77
6.46
0.82
1.85
1.31
1985
6.59
6.63
11.
431.
1119
866.
659.
421.
911.
491.
0219
877.
3611
.80
0.73
1.62
0.82
1988
8.96
12.5
60.
931.
821.
0319
899.
8412
.28
0.98
2.05
1.11
1990
10.0
615
.36
1.00
2.34
1.07
1991
10.3
315
.81
1.10
2.78
0.84
1992
10.0
417
.80
1.06
3.23
1.29
1993
9.53
17.6
51.
081.
600.
9319
9410
.75
18.7
21.
111.
791.
3119
9511
.55
17.8
71.
112.
151.
3219
9612
.83
17.5
70.
842.
321.
4419
9716
.58
15.4
10.
942.
481.
5519
9810
.91
16.0
51.
022.
411.
7119
9915
.66
15.3
61.
072.
241.
4520
0010
.52
13.6
01.
092.
201.
5920
019.
4012
.49
1.22
1.99
1.60
2002
11.5
518
.75
1.30
1.97
1.46 37
Tabl
e 4:
Reg
ress
ion
Res
ults
(1)
(2)
(3)
(4)
(5)
Dependent Variable: Log (Average Hourly Wage) (5 year average)
Log(TopCorpTax)
-0.836
-0.841
-1.047
-1.193
(2.85)***
(2.80)***
(2.03)** (2.04)**
Log(ValueAdded)
0.444
0.438
0.644
0.621 0.246
(1.79)*
(1.71)*
(2.56)**
(2.37)**(0.55)
Log(CPI)
0.566
0.611
0.465
0.456 1.004
(2.68)***
(2.53)**
(1.73)*
(1.65)* (1.88)*
Log(PersonalTax)
-0.134
-0.117
-0.259
0.666 -0.724
(0.51)
(0.44)
(0.96)
(1.37)
(1.44)
Log(Trade/GDP)
0.067
0.027
-0.005
(0.26)
(0.09)
(0.02)
Log(LaborMktReg)
0.121
(0.20)
Log(Computerization)
0.032
(0.19)
Constant
-6.21
-6.67
-6.45
-5.69 -4.63
(2.35)**
(2.32)**
(2.13)**
(1.63)* (0.98)
Observations
218
214
215
180
128
OverallR-squared0.26
0.26
0.21
0.29
0.26
_______________________________________________________________________
Absolute value of t statistics in parentheses
***significant at 1%; **significant at 5%;*significant at 10%
1. All specifications include country fixed effects and period dummies.
2. The dependent variable is the 5 year average of the wage rate over
sub-periods: 1981-1985, 1986-1990, 1991-1995, 1996-2000,2001-2002. The
independent variables are the beginning of period values of these
variables.
38
Page 98
Tabl
e 5:
Oth
er T
ax M
easu
res
(1)
(2)
(3)
(4)
Dependent variable: Log(Average hourly wage) (5 year average)
Log(Eff.Mrg.Tax)
-0.372
-0.344
(1.66)*
(1.48)
Log(Eff.Avg.Tax)
-0.660
-0.589
(2.00)**
(1.83)*
Log(ValueAdded)
0.478
0.422
0.568
-0.528
(1.84)*
(1.61)
(2.10)**
(1.99)**
Log(PersonalTax)
-0.197
-0.189
-0.274
-0.263
(0.73)
(0.72)
(0.87)
(0.87)
Log(CPI)
0.710
0.742
0.452
0.474
(2.91)***
(3.08)***
(1.81)*
(1.98)*
Constant
-6.495
-6.439
-5.88
-5.94
(2.26)**
(2.27)**
(2.09)**
(2.18)**
Observations
195
199
94
97
Sample
All
All
Non-OECD
Non-OECD
R-squared
0.24
0.22
0.16
0.18
Absolute value of t statistics in parentheses
***significant at 1%; ** significant at 5%;*significant at 10%
1. All specifications include country fixed effects and period dummies.
2. The dependent variable is the 5 year average of the wage rate over
sub-periods: 1981-1985, 1986-1990, 1991-1995, 1996-2000,2001-2002. The
independent variables are the beginning of period values of these
variables.
39
Tabl
e 6:
Reg
ress
ions
with
Spa
tial V
aria
bles
(1)
(2)
(3)
(4)
(5)
Dependent Variable:Log(Average Hourly Wage) (5 year average)
Log(TopCorpTax)
-0.900
-0.900
-0.979
(3.03)***
(2.98)***
(3.18)***
Log(Eff.Marg.Tax)
-0.312
(1.39)
Log(Eff.Avg.Tax)
-0.706
(2.16)**
Log(ValueAdded)
0.252
0.403
0.471
0.358 0.173
(0.96)
(1.44)
(1.77)*
(1.19)
(0.63)
Log(CPI)
0.506
0.419
0.449
0.396 0.556
(2.43)**
(1.93)*
(2.15)**
(1.49) (2.15)**
Wgt.OwnRegWage
0.395
0.408
(2.25)*
(2.26)**
Wgt.OwnRegTax
0.097
0.517
(0.39)
(2.93)*
Incwt.OwnRegWage
0.468
0.557
(1.64)*
(1.87)*
Incwt.OwnRegTax
0.504
(1.50)
Incwt.OwnRegEffMargTax
0.548
(1.71)*
Distincwt.OwnRegWage
0.347
(1.69)*
Distincwt.OwnRegTax
0.531
(1.87)*
Constant
-4.851
-5.563
-6.328
-4.51 -3.75
(1.93)*
(2.07)**
(2.46)**
(1.49) (1.38)
Observations
220
222
222
197
201
R-squared
0.27
0.25
0.26
0.22
0.20
_______________________________________________________________________
Absolute value of t statistics in parentheses
***significant at 1%; ** significant at 5%;*significant at 10%
1. All specifications include country fixed effects and period dummies.
2. The dependent variable is the 5 year average of the wage rate over
sub-periods: 1981-1985, 1986-1990, 1991-1995, 1996-2000,2001-2002. The
independent variables are the beginning of period values of these
variables.
3.
Columns
(1)
and
(5)use
GDP-weighted
own
region
countries
as
neighbors. Column (2) and (4) use GDP-weighted own Income group
countries as neighbors. Column (3) uses Distance weighted own Income
group countries as neighbors.
40
Page 99
Tabl
e 7:
Res
ults
with
Oth
er E
xpla
nato
ry V
aria
bles
: Dem
ocra
cy, P
ayro
ll an
d V
AT
Taxe
s
(1) (2)
(3)
(4)
Dependent Variable: Log(Average Hourly Wage) (5 year average)
Log(TopCorpTax)
-0.794
-0.592
-0.625 -0.949
(2.65)***
(1.79)*
(1.88)*
(3.11)***
Log(ValueAdded)
-0.417
0.642
0.780
0.685
(1.70)*
(1.90)*
(2.67)***
(3.19)***
Log(CPI)
0.514
0.549
0.863
0.464
(2.45)**
(2.38)**
(2.63)***
(2.62)**
Log(PersonalTax)
-0.329
-0.192
(1.02)
(0.91)
Democracy
0.355
(0.90)
Log(Payrolltax)
-0.223
(1.25)
Log(VAT)
-0.510
(1.31)
Constant
-1.498
-6.73
-9.52
-7.86
(0.53)***
(1.88)*
(2.74)***
(3.53)***
Observations
220
254
158
175
Sample
All
All
All
Exclude SS
R-squared
0.28
0.25
0.21
0.23
Absolute value of t statistics in parentheses
*** significant at 1%; ** significant at 5%;***significant at 10%
_________________________________________________________________
1. All specifications include country fixed effects and period dummies.
2. The dependent variable is the 5 year average of the wage rate over
sub-periods: 1981-1985, 1986-1990, 1991-1995, 1996-2000,2001-2002. The
independent variables are the beginning of period values of these
variables.
41
Tabl
e 8:
Sm
all E
cono
my
Res
ults
(1) (2)
(3)
Dependent Variable: Log(Average Hourly Wage) (5 year average)
Log(TopCorpTax)
-0.842
-1.070
-1.543
(2.88)***
(3.16)***
(1.88)*
Log(Personaltax)
-0.156
-0.045
-0.413
(0.61)
(0.15)
(0.58)
Log(ValueAdded)
0.453
0.206
0.248
(1.83)*
(0.62)
(1.20)
Log(CPI)
0.589
0.556
0.538
(2.85)***
(2.33)**
(1.53)
Constant
-6.300
-4.553
-4.466
(2.39)***
(1.23)
(2.13)**
Sample
All
All-Top 10
Smallest12
Observations
218
178
44
Absolute value of t statistics in parentheses
*** significant at 1%; ** significant at 5%;*significant at 10%
_________________________________________________________________
1. All specifications include country fixed effects and period dummies.
2. The dependent variable is the 5 year average of the wage rate over
sub-periods: 1981-1985, 1986-1990, 1991-1995, 1996-2000,2001-2002. The
independent variables are the beginning of period values of these
variables.
42
Page 100
Tabl
e 9:
Oth
er S
peci
ficat
ions
: Ran
dom
Eff
ects
, OLS
Dependent Variable: Log(Average Hourly Wage)
(1)
(2)
(3)
RE GLS(5-yr average) OLS(5-yr average)RE GLS (3-year average)
Log(TopCorpTax)
-0.919
-0.844
-0.517
(3.55)***
(2.59)***
(2.72)***
Log(ValueAdded)
0.245
0.183
0.319
(2.47)**
(1.49)
(3.31)**
Log(PersonalTax)
-0.174
0.082
0.198
(0.76)
(0.28)
(1.06)
Log(CPI)
0.825
1.014
0.725
(4.82)***
(4.33)***
(4.43)***
EastAfr
1.241
(1.88)
SouthAfr
1.545
(2.88)**
Caribbean
2.416
(3.31)**
Cent.America
0.995
(2.09)*
South.Am
0.361
(0.84)
Southasia
-0.374
(0.64)
Westasia
-0.728
(1.50)
Easteuro
0.163
(0.38)
Northeuro
1.585
(4.20)**
Southeuro
1.052
(2.57)*
Westeuro
1.647
(4.22)**
Southeastasia
0.422
(1.00)
Constant
-5.272
-5.481
-6.389
(1.55)**
(3.22)**
(5.61)**
PeriodDummies
Yes
Yes
Yes
Observations
218
218
309
R-squared
0.29
0.50
0.27
_______________________________________________________________________
Absolute value of z statistics in parentheses
*** significant at 1%; ** significant at 5%;*significant at 10%
43
Dat
a A
ppen
dix
The
stat
istic
s on
wag
es a
re o
btai
ned
from
the
ILO
’s K
ey In
dica
tors
of t
he L
abor
Mar
ket (
KIL
M).
The
ILO
repo
rts a
vera
ge e
arni
ngs p
er w
orke
r or,
in so
me
case
s, av
erag
e
wag
e ra
tes.
Som
e of
the
serie
s cov
er w
age
earn
ers (
i.e. m
anua
l or p
rodu
ctio
n w
orke
rs)
only
, whi
le o
ther
s ref
er to
sala
ried
empl
oyee
s (i.e
. non
-man
ual w
orke
rs),
or a
ll em
ploy
ees
(i.e.
wag
e ea
rner
s and
sala
ried
empl
oyee
s). T
he se
ries c
over
wor
kers
of b
oth
sexe
s,
irres
pect
ive
of a
ge.
Earn
ings
:The
con
cept
of e
arni
ngs r
elat
es to
rem
uner
atio
n in
cas
h an
d in
kin
d
paid
to e
mpl
oyee
s, as
a ru
le a
t reg
ular
inte
rval
s, fo
r tim
e w
orke
d or
wor
k do
ne to
geth
er
with
rem
uner
atio
n fo
r tim
e no
t wor
ked,
such
as f
or a
nnua
l vac
atio
n, o
ther
pai
d le
ave
or
holid
ays.
Earn
ings
exc
lude
em
ploy
ers’
con
tribu
tions
in re
spec
t of t
heir
empl
oyee
s pai
d to
soci
al se
curit
y an
d pe
nsio
n sc
hem
es a
nd a
lso
the
bene
fits r
ecei
ved
by e
mpl
oyee
s und
er
thes
e sc
hem
es. E
arni
ngs a
lso
excl
ude
seve
ranc
e an
d te
rmin
atio
n pa
y.
Stat
istic
s of e
arni
ngs s
houl
d re
late
to e
mpl
oyee
s’ g
ross
rem
uner
atio
n, i.
e. th
e to
tal
befo
re a
ny d
educ
tions
are
mad
e by
the
empl
oyer
in re
spec
t of t
axes
, con
tribu
tions
of
empl
oyee
s to
soci
al se
curit
y an
d pe
nsio
n sc
hem
es, l
ife in
sura
nce
prem
ium
s, un
ion
dues
and
othe
r obl
igat
ions
of e
mpl
oyee
s.
Earn
ings
incl
ude:
dire
ct w
ages
and
sala
ries,
rem
uner
atio
n fo
r tim
e no
t wor
ked
(exc
ludi
ng se
vera
nce
and
term
inat
ion
pay)
, bon
uses
and
gra
tuiti
es a
nd h
ousi
ng a
nd
fam
ily a
llow
ance
s pai
d by
the
empl
oyer
dire
ctly
to th
is e
mpl
oyee
. (a)
Dire
ct w
ages
and
sala
ries f
or ti
me
wor
ked,
or w
ork
done
, cov
er: (
i) st
raig
ht ti
me
pay
of ti
me-
rate
d w
orke
rs;
(ii) i
ncen
tive
pay
of ti
me-
rate
d w
orke
rs; (
iii) e
arni
ngs o
f pie
ce w
orke
rs (e
xclu
ding
over
time
prem
ium
s); (
iv) p
rem
ium
pay
for o
verti
me,
shift
, nig
ht a
nd h
olid
ay w
ork;
(v)
com
mis
sion
s pai
d to
sale
s and
oth
er p
erso
nnel
. Inc
lude
d ar
e: p
rem
ium
s for
seni
ority
and
spec
ial s
kills
, geo
grap
hica
l zon
e di
ffer
entia
ls, r
espo
nsib
ility
pre
miu
ms,
dirt,
dan
ger a
nd
disc
omfo
rt al
low
ance
s, pa
ymen
ts u
nder
gua
rant
eed
wag
e sy
stem
s, co
st-o
f-liv
ing
allo
wan
ces a
nd o
ther
regu
lar a
llow
ance
s. (b
) Rem
uner
atio
n fo
r tim
e no
t wor
ked
com
pris
es d
irect
pay
men
ts to
em
ploy
ees i
n re
spec
t of p
ublic
hol
iday
s, an
nual
vac
atio
ns
and
othe
r tim
e of
f with
pay
gra
nted
by
the
empl
oyer
. (c)
Bon
uses
and
gra
tuiti
es c
over
44
Page 101
seas
onal
and
end
-of-
year
bon
uses
, add
ition
alpa
ymen
ts in
resp
ect o
f vac
atio
n pe
riod
(sup
plem
enta
ry to
nor
mal
pay
) and
pro
fit-s
harin
g bo
nuse
s. (ii
) Sta
tistic
s of e
arni
ngs
shou
ld d
istin
guis
h ca
sh e
arni
ngs f
rom
pay
men
ts in
kin
d.
Wag
e ra
tes:
The
se in
clud
e ba
sic
wag
es, c
ost-o
f-liv
ing
allo
wan
ces a
nd o
ther
gua
rant
eed
and
regu
larly
pai
d al
low
ance
s, bu
t exc
lude
ove
rtim
e pa
ymen
ts, b
onus
es a
nd g
ratu
ities
,
fam
ily a
llow
ance
s and
oth
er so
cial
secu
rity
paym
ents
mad
e by
em
ploy
ers.
Ex g
ratia
paym
ents
in k
ind,
supp
lem
enta
ry to
nor
mal
wag
e ra
tes,
are
also
exc
lude
d.
Thus
bro
adly
cou
ntry
cov
erag
e di
ffer
s due
to th
e fo
llow
ing
reas
ons:
(1) w
heth
er
the
repo
rted
stat
istic
is w
ages
or e
arni
ngs (
2) w
heth
er it
cov
ers e
mpl
oyee
s, w
age
earn
ers
or sa
larie
d em
ploy
ees (
3) w
heth
er it
incl
udes
soci
al se
curit
y co
ntrib
utio
ns b
y em
ploy
er.
Whe
n w
e st
udie
d th
e de
scrip
tions
mor
e cl
osel
y, w
e fo
und
that
cer
tain
cou
ntrie
s lik
e
Chi
le, T
urke
y, C
olom
bia,
Ecu
ador
, Ken
ya, K
yrgy
zsta
n, M
exic
o, M
alay
sia,
Pan
ama
and
Ukr
aine
incl
uded
soci
al se
curit
y co
ntrib
utio
ns b
y em
ploy
ers i
n th
e ea
rnin
gs d
ata.
Ano
ther
diff
eren
ce a
rises
bec
ause
the
indu
stria
l cla
ssifi
catio
n ch
ange
d du
ring
this
per
iod.
Sin
ce
the
begi
nnin
g of
the
1990
s an
incr
easi
ng n
umbe
r of c
ount
ries h
ave
mad
e a
switc
hove
r in
thei
r dat
a re
porti
ng sy
stem
s for
indu
stria
l sta
tistic
s fro
m R
evis
ion
2 to
Rev
isio
n 3
of th
e
Inte
rnat
iona
l Sta
ndar
d C
lass
ifica
tion
of A
ll Ec
onom
ic A
ctiv
ities
(ISI
C).
Incl
udin
g du
mm
ies t
o al
low
for a
ll th
ese
diff
eren
ces i
n co
vera
ge in
a p
anel
regr
essi
on (w
ithou
t cou
ntry
fixe
d ef
fect
s)yi
elde
d a
high
ly si
gnifi
cant
neg
ativ
e si
gn o
n
corp
orat
e ta
x ra
tes,
and
no c
hang
e in
resu
lts fo
r the
oth
er v
aria
bles
.
45
Page 102
Wor
king
Pap
er S
erie
sC
ongr
essi
onal
Bud
get O
ffic
eW
ashi
ngto
n, D
.C.
Inte
rnat
iona
l Bur
dens
of t
he C
orpo
rate
Inco
me
Tax
Will
iam
C. R
ando
lph
(em
ail:
will
iam
.rand
olph
@cb
o.go
v)C
ongr
essi
onal
Bud
get O
ffic
eW
ashi
ngto
n, D
.C.
Aug
ust,
2006
2006
-09
Wor
king
pap
ers i
n th
is se
ries a
re p
relim
inar
y an
d ar
e ci
rcul
ated
to st
imul
ate
disc
ussi
on a
ndcr
itica
l com
men
t. Th
ese
pape
rs a
re n
ot su
bjec
t to
CB
O’s
form
al re
view
and
edi
ting
proc
esse
s.Th
e an
alys
is a
nd c
oncl
usio
ns e
xpre
ssed
in th
em a
re th
ose
of th
e au
thor
s and
shou
ld n
ot b
ein
terp
rete
d as
thos
e of
the
Con
gres
sion
al B
udge
t Off
ice.
Ref
eren
ces i
n pu
blic
atio
ns sh
ould
be
clea
red
with
the
auth
ors.
Pape
rs in
this
serie
s can
be
obta
ined
at w
ww
.cbo
.gov
(sel
ect
Publ
icat
ions
and
then
Wor
king
Pap
ers)
.1 T
he a
utho
r wou
ld li
ke to
than
k A
lan
Aue
rbac
h, B
ob D
enni
s, Ja
ne G
rave
lle, H
arry
Gru
bert,
Lar
ry O
zann
e, B
obW
illia
ms,
and
Tom
Woo
dwar
d fo
r the
ir co
mm
ents
and
sugg
estio
ns.
Abs
trac
t1
This
stud
y ap
plie
s a si
mpl
e tw
o-co
untry
, fiv
e-se
ctor
, gen
eral
equ
ilibr
ium
mod
el b
ased
on
Har
berg
er (1
995,
200
6) to
exa
min
e th
e lo
ng-r
un in
cide
nce
of a
cor
pora
te in
com
e ta
x in
an
open
econ
omy.
In
equi
libriu
m, c
apita
l is a
ssum
ed to
be
perf
ectly
mob
ile in
tern
atio
nally
in th
e se
nse
that
the
coun
try in
whi
ch a
real
inve
stm
ent i
s loc
ated
doe
s not
mat
ter t
o th
e m
argi
nal i
nves
tor.
Inad
ditio
n, e
ach
coun
try is
ass
umed
to p
rodu
ce a
t lea
st so
me
trada
ble
corp
orat
e go
ods f
or w
hich
the
coun
try c
anno
t aff
ect w
orld
out
put p
rices
.Li
ke th
e or
igin
al H
arbe
rger
(196
2) m
odel
, the
wor
ldw
ide
stoc
k of
cap
ital a
nd th
e su
pply
of l
abor
in e
ach
coun
try a
re fi
xed.
Und
er th
ose
assu
mpt
ions
, the
mod
el p
rovi
des c
lose
d fo
rm so
lutio
ns a
nd e
asily
und
erst
ood
pred
ictio
ns a
bout
its c
ompa
rativ
e st
atic
equ
ilibr
ia.
As w
ith a
ny si
mpl
ified
mod
el, t
he a
naly
sis i
s sile
nt a
bout
som
epo
tent
ially
impo
rtant
issu
es –
such
as t
he e
ffec
t of t
he c
orpo
rate
tax
on sa
ving
s, gr
owth
and
oth
erdy
nam
ics –
that
may
als
o ha
ve im
porta
nt e
ffec
ts o
n co
rpor
ate
tax
inci
denc
e.
The
anal
ysis
show
s how
the
dom
estic
ow
ners
of c
apita
l can
esc
ape
mos
t of t
he c
orpo
rate
inco
me
tax
burd
en w
hen
capi
tal i
s rea
lloca
ted
abro
ad in
resp
onse
to th
e ta
x. B
ut, a
s in
Bra
dfor
d (1
978)
,ca
pita
l ow
ners
wor
ldw
ide
cann
ot e
scap
e th
e ta
x.R
eallo
catio
n of
cap
ital a
broa
d dr
ives
dow
n th
epe
rson
al re
turn
to in
vest
men
t so
that
cap
ital o
wne
rs w
orld
wid
e be
ar a
ppro
xim
atel
y th
e fu
llbu
rden
of t
he d
omes
tic c
orpo
rate
inco
me
tax.
For
eign
wor
kers
ben
efit
beca
use
an in
crea
sed
fore
ign
stoc
k of
cap
ital r
aise
s the
ir pr
oduc
tivity
and
thei
r wag
es.
Dom
estic
wor
kers
lose
bec
ause
thei
r pro
duct
ivity
falls
and
they
can
not e
mig
rate
to ta
ke a
dvan
tage
of h
ighe
r for
eign
wag
es.
Und
er b
asic
ass
umpt
ions
of t
he n
umer
ical
app
licat
ion,
the
outc
ome
is a
lso
sim
ilar t
o th
eim
plic
atio
ns o
f the
sim
pler
mod
el o
f Bra
dfor
d in
that
the
full
wor
ldw
ide
burd
en fa
lls o
n do
mes
ticow
ners
of p
rodu
ctiv
e in
puts
. Th
at o
utco
me
chan
ges,
how
ever
, und
er a
ltern
ativ
e as
sum
ptio
ns.
Bur
dens
are
mea
sure
d in
a n
umer
ical
exa
mpl
e by
subs
titut
ing
fact
or sh
ares
and
out
put s
hare
sth
at a
re re
ason
able
for t
he U
.S. e
cono
my.
Giv
en th
ose
valu
es, d
omes
tic la
bor b
ears
slig
htly
mor
e th
an 7
0 pe
rcen
t of t
he b
urde
n of
the
corp
orat
e in
com
e ta
x. T
he d
omes
tic o
wne
rs o
f cap
ital
bear
slig
htly
mor
e th
an 3
0 pe
rcen
t of t
he b
urde
n. D
omes
tic la
ndow
ners
rece
ive
a sm
all b
enef
it.
At t
he sa
me
time,
the
fore
ign
owne
rs o
f cap
ital b
ear s
light
ly m
ore
than
70
perc
ent o
f the
bur
den,
but t
heir
burd
en is
exa
ctly
off
set b
y th
e be
nefit
s rec
eive
d by
fore
ign
wor
kers
and
land
owne
rs.
To th
e ex
tent
that
cap
ital i
s les
s mob
ile in
tern
atio
nally
, dom
estic
labo
r’s b
urde
n w
ould
be
low
eran
d do
mes
tic c
apita
l’s b
urde
n w
ould
be
high
er.
Bur
dens
can
als
o be
aff
ecte
d by
the
dom
estic
coun
try’s
abi
lity
to in
fluen
ce th
e w
orld
pric
es o
f som
e tra
ded
corp
orat
e ou
tput
s. B
ut th
e si
gns
and
mag
nitu
des o
f tho
se e
ffec
ts o
n bu
rden
dep
end
upon
the
rela
tive
capi
tal i
nten
sitie
s of
prod
uctio
n in
the
corp
orat
e se
ctor
s tha
t pro
duce
inte
rnat
iona
lly tr
adab
le g
oods
.
Page 103
2 The
re a
re a
lso
othe
r sou
rces
of i
neff
icie
ncy
unde
r the
cor
pora
te ta
x (s
ee G
rave
lle, 1
994;
Con
gres
sion
al B
udge
tO
ffic
e, 2
005b
; and
Judd
, 200
6).
3 In
the
shor
t run
, cha
nges
in th
e co
rpor
ate
inco
me
tax
are
mos
t lik
ely
born
e by
exi
stin
g co
rpor
ate
shar
ehol
ders
(see
Aue
rbac
h, 2
005)
.4 R
osen
(200
2), p
p. 2
94-2
99, a
nd F
ulle
rton
and
Met
calf
(200
2), p
p. 1
812-
1815
, pro
vide
det
aile
d di
scus
sion
s of t
heH
arbe
rger
mod
el.
-1-
I.In
trod
uctio
n
In a
clo
sed
econ
omy,
the
corp
orat
e in
com
e ta
x ca
uses
pro
duct
ion
to b
e in
effic
ient
beca
use
the
tax
is n
ot im
pose
d eq
ually
on
the
inco
me
from
all
capi
tal u
sed
in th
e co
rpor
ate
and
nonc
orpo
rate
sect
ors.
Tha
t diff
eren
ce c
ause
s the
cap
ital i
nten
sity
of p
rodu
ctio
n to
be
too
low
in
the
corp
orat
e se
ctor
s and
too
high
in th
e no
ncor
pora
te se
ctor
s. T
he c
orpo
rate
tax
is in
effic
ient
beca
use
the
mar
gina
l pre
-tax
retu
rn fr
om c
orpo
rate
inve
stm
ent e
xcee
ds th
e m
argi
nal p
re-ta
x
retu
rn fr
om n
onco
rpor
ate
inve
stm
ent i
n eq
uilib
rium
.2
It is
not
as c
lear
who
bea
rs th
e lo
ng-r
un b
urde
n of
the
corp
orat
e ta
x in
a c
lose
d ec
onom
y.3
But
in o
ne o
f the
bes
t-kno
wn
anal
yses
in p
ublic
fina
nce,
Har
berg
er (1
962)
foun
d th
at th
e U
.S.
corp
orat
e ta
x is
like
ly to
be
born
e en
tirel
y by
all
owne
rs o
f cap
ital.
How
that
mig
ht o
ccur
can
be u
nder
stoo
d, ro
ughl
y, in
term
s of t
he e
ffec
ts th
at th
e ta
x ha
s on
outp
ut a
nd in
put s
ubst
itutio
n
deci
sion
s mad
e by
con
sum
ers a
nd p
rodu
cers
.4 In
the
Har
berg
er m
odel
of a
clo
sed
econ
omy,
the
tota
l sup
plie
s of l
abor
and
cap
ital a
re fi
xed
but p
erfe
ctly
mob
ile b
etw
een
sect
ors.
In re
spon
se to
the
tax,
con
sum
ers s
ubst
itute
aw
ay fr
om th
e m
ore
heav
ily ta
xed
corp
orat
e go
ods s
o th
at
prod
uctio
n sh
ifts t
o th
e no
ncor
pora
te se
ctor
. C
orpo
rate
pro
duce
rs su
bstit
ute
away
from
the
taxe
d
inpu
t – c
orpo
rate
cap
ital –
whi
ch p
ushe
s up
the
capi
tal i
nten
sity
of p
rodu
ctio
n in
the
nonc
orpo
rate
sect
or, t
hus r
educ
ing
the
afte
r-ta
x re
turn
to c
apita
l.
Und
er a
ssum
ptio
ns c
onsi
dere
d re
ason
able
for t
he U
.S. e
cono
my,
Har
berg
er (1
962)
foun
d
that
the
outp
ut a
nd in
put s
ubst
itutio
n de
cisi
ons c
ombi
ne in
such
a w
ay th
at p
erso
nal c
apita
l
-2-
inco
me
is re
duce
d ex
actly
by
the
full
burd
en o
f the
cor
pora
te ta
x, a
nd w
ages
rem
ain
cons
tant
.
Pers
onal
cap
ital i
ncom
e is
redu
ced
to th
e sa
me
degr
ee re
gard
less
of w
heth
er th
e ca
pita
l ow
ners
inve
st in
the
corp
orat
e se
ctor
or t
he n
onco
rpor
ate
sect
or.
The
effe
cts o
f the
cor
pora
te in
com
e ta
x in
an
open
eco
nom
y ar
e ob
viou
sly
mor
e
com
plic
ated
. Th
e ta
x is
like
ly to
be
even
less
eff
icie
nt b
ecau
se it
can
dis
tort
both
the
dom
estic
and
the
inte
rnat
iona
l allo
catio
ns o
f cap
ital.
Dom
estic
wor
kers
are
mor
e lik
ely
to b
ear a
bur
den
beca
use
wor
kers
can
not m
ove
read
ily b
etw
een
coun
tries
. D
omes
tic w
ages
will
fall
whe
n ca
pita
l
is re
allo
cate
d ab
road
and
dom
estic
wor
kers
can
not m
ove
to ta
ke a
dvan
tage
of a
hig
her f
orei
gn
wag
e ra
te.
At t
he sa
me
time,
fore
ign
labo
r rec
eive
s a b
enef
it fr
om th
e in
crea
se in
fore
ign
capi
tal.
The
open
eco
nom
y is
diff
icul
t to
anal
yze
beca
use
labo
r and
cap
ital o
wne
rs c
an b
e do
mes
tic o
r
fore
ign,
and
eac
h se
ctor
of e
ach
econ
omy
can
prod
uce
good
s and
serv
ices
that
are
trad
ed o
r not
trade
d in
tern
atio
nally
. A
dom
estic
cor
pora
te ta
x ca
n af
fect
the
dom
estic
and
fore
ign
pric
es o
f
inpu
ts a
nd o
utpu
ts, t
he d
omes
tic a
nd fo
reig
n na
tiona
l inc
omes
, and
the
dom
estic
and
fore
ign
dist
ribut
ions
of i
ncom
e. T
he w
orld
eco
nom
y si
mpl
y ha
s mor
e di
men
sion
s.
Mel
vin
(198
2) e
xam
ines
a w
orld
eco
nom
y in
whi
ch th
ere
is in
tern
atio
nal t
rade
but
no
inte
rnat
iona
l inv
estm
ent.
He
finds
that
the
dom
estic
bur
den
of th
e co
rpor
ate
inco
me
tax
falls
prim
arily
on
the
fact
or th
at is
use
d m
ost i
nten
sive
ly in
the
corp
orat
e se
ctor
. In
the
Uni
ted
Stat
es,
that
fact
or is
labo
r. H
is m
odel
div
ides
the
wor
ld in
to tw
o co
untri
es th
at e
ach
prod
uce
the
sam
e
two
inte
rnat
iona
lly tr
aded
goo
ds.
The
supp
lies o
f lab
or a
nd c
apita
l are
fixe
d an
d im
mob
ile
inte
rnat
iona
lly.
He
assu
mes
initi
ally
that
the
dom
estic
eco
nom
y is
smal
l so
that
dom
estic
econ
omic
dec
isio
ns c
anno
t aff
ect t
he w
orld
pric
es o
f tra
ded
good
s.
Page 104
-3-
Und
er th
ose
assu
mpt
ions
, a d
omes
tic ta
x im
pose
d on
cap
ital i
ncom
e in
the
corp
orat
e
sect
or c
ause
s the
dom
estic
eco
nom
y to
shift
pro
duct
ion
tow
ard
the
nonc
orpo
rate
sect
or.
If th
e
corp
orat
e se
ctor
is m
ore
labo
r-in
tens
ive
than
the
nonc
orpo
rate
sect
or, b
oth
the
corp
orat
e an
d th
e
nonc
orpo
rate
dom
estic
sect
ors b
ecom
e le
ss c
apita
l-int
ensi
ve in
equ
ilibr
ium
as a
resu
lt of
prod
ucer
resp
onse
s to
the
tax.
At a
low
er c
apita
l int
ensi
ty, t
he re
turn
to d
omes
tic c
apita
l act
ually
incr
ease
s and
dom
estic
labo
r can
bea
r mor
e th
an 1
00 p
erce
nt o
f the
cor
pora
te in
com
e ta
x. E
ven
if th
e do
mes
tic e
cono
my
is la
rge
enou
gh to
aff
ect t
he w
orld
pric
es o
f the
trad
ed g
oods
, Mel
vin
finds
that
the
corp
orat
e ta
x bu
rden
still
falls
prim
arily
on
the
fact
or th
at is
use
d m
ost i
nten
sive
ly
in th
e co
rpor
ate
sect
or.
Mel
vin’
s ana
lysi
s sho
ws t
hat t
he c
orpo
rate
tax
burd
en c
an b
e sh
ifted
to d
omes
tic la
bor
even
whe
n th
ere
is n
o in
tern
atio
nal i
nves
tmen
t, an
d ev
en w
hen
the
dom
estic
eco
nom
y is
larg
e
enou
gh to
influ
ence
the
pric
es o
f int
erna
tiona
lly tr
aded
goo
ds.
How
ever
, tho
se re
sults
are
not
fully
robu
st to
the
addi
tion
of in
tern
atio
nally
mob
ile c
apita
l, th
e pr
oduc
tion
of g
oods
that
are
not
trade
d in
tern
atio
nally
, and
the
poss
ibili
ty o
f im
perf
ect d
eman
d su
bstit
utio
n be
twee
n do
mes
tic-
and
fore
ign-
prod
uced
inte
rnat
iona
lly tr
adab
le g
oods
. U
nfor
tuna
tely
, try
ing
to a
ccou
nt fo
r all
of
thos
e is
sues
can
mak
e th
e an
alys
is v
ery
diff
icul
t.
Gra
velle
and
Sm
ette
rs (2
006)
con
stru
ct a
com
puta
ble
gene
ral e
quili
briu
m m
odel
in w
hich
the
wor
ld is
div
ided
into
two
coun
tries
with
four
pro
duct
ive
sect
ors i
n ea
ch c
ount
ry.
The
dom
estic
eco
nom
y is
div
ided
into
cor
pora
te a
nd n
onco
rpor
ate
sect
ors,
like
the
orig
inal
Har
berg
er
(196
2) m
odel
, but
eac
h se
ctor
is fu
rther
subd
ivid
ed in
to a
subs
ecto
r tha
t pro
duce
s int
erna
tiona
lly
trade
able
goo
ds a
nd a
sub-
sect
or th
at p
rodu
ces g
oods
that
are
not
trad
ed b
etw
een
coun
tries
. Li
ke
Mut
ti an
d G
rube
rt (1
985)
, Gra
velle
and
Sm
ette
rs a
llow
for t
he p
ossi
bilit
y th
at c
apita
l is n
ot5 T
he G
rave
lle a
nd S
met
ters
mod
el is
ver
y si
mila
r to
the
mod
el c
onst
ruct
ed b
y M
utti
and
Gru
bert,
alth
ough
Mut
tian
d G
rube
rt do
not
mea
sure
labo
r’s i
ncid
ence
of t
he c
orpo
rate
inco
me
tax.
6 Gra
velle
and
Sm
ette
rs (2
006)
, Tab
le 2
.
-4-
perf
ectly
mob
ile in
tern
atio
nally
, and
for t
he p
ossi
bilit
y th
at fo
reig
n an
d do
mes
tic tr
adab
le g
oods
are
impe
rfec
t sub
stitu
tes i
n co
nsum
ptio
n.5
Gra
velle
and
Sm
ette
rs fi
nd th
at th
e co
rpor
ate
tax
burd
en im
pose
d on
dom
estic
labo
r is
smal
l whe
n th
e de
man
d su
bstit
utab
ility
bet
wee
n do
mes
tic a
nd fo
reig
n tra
dabl
e go
ods i
s low
.
Alth
ough
thei
r mod
el is
diff
eren
t fro
m M
elvi
n’s m
odel
, the
ir tra
de re
sult
is si
mila
r to
that
ear
lier
findi
ng: T
he b
urde
n im
pose
d on
dom
estic
labo
r can
be
redu
ced
whe
n th
e do
mes
tic c
ount
ry c
an
influ
ence
the
wor
ld p
rices
of i
nter
natio
nally
trad
ed g
oods
. In
Mel
vin,
that
inte
rnat
iona
l mar
ket
pow
er is
larg
e w
hen
the
dom
estic
eco
nom
y is
larg
e co
mpa
red
with
the
rest
of t
he w
orld
. In
Gra
velle
and
Sm
ette
rs, t
he in
tern
atio
nal m
arke
t pow
er is
larg
e w
hen
ther
e is
a lo
w d
egre
e of
subs
titut
abili
ty b
etw
een
the
dom
estic
and
fore
ign
trada
ble
corp
orat
e go
ods.
Eve
n a
smal
l
coun
try c
an h
ave
the
latte
r typ
e of
mar
ket p
ower
. In
bot
h m
odel
s, th
e co
rpor
ate
tax
can
affe
ct
both
dom
estic
and
fore
ign
natio
nal w
elfa
re in
way
s tha
t ope
rate
, in
part,
like
an
ad v
alor
em ta
riff
on e
xpor
ts, a
s illu
stra
ted
in W
halle
y (1
980)
.
Whe
n in
tern
atio
nal c
apita
l mob
ility
is p
erfe
ct a
nd th
e su
bstit
utab
ility
bet
wee
n do
mes
tic
and
fore
ign
corp
orat
e tra
dabl
e go
ods i
s ver
y hi
gh, G
rave
lle a
nd S
met
ters
find
that
dom
estic
labo
r’s b
urde
n eq
uals
abo
ut 7
3 pe
rcen
t of c
orpo
rate
tax
reve
nue.
6 Alth
ough
the
fore
ign
capi
tal
owne
rs’ b
urde
n eq
uals
67
perc
ent o
f the
dom
estic
reve
nue,
that
bur
den
is fu
lly o
ffse
t by
a be
nefit
that
fore
ign
wor
kers
rece
ive
beca
use
they
bec
ome
mor
e pr
oduc
tive.
Thu
s, no
ne o
f the
net
burd
en is
exp
orte
d to
fore
igne
rs.
How
ever
, dom
estic
labo
r’s s
hare
of t
he b
urde
n ca
n be
muc
h
smal
ler a
nd a
net
bur
den
can
be e
xpor
ted
whe
n th
e tra
dabl
e go
ods a
re le
ss su
bstit
utab
le.
For
exam
ple,
whe
n th
e ag
greg
ate
trade
subs
titut
ion
elas
ticity
equ
als 1
, a v
alue
that
Gra
velle
and
Page 105
-5-
Smet
ters
cite
as r
easo
nabl
e ba
sed
on p
revi
ous e
mpi
rical
stud
ies,
dom
estic
labo
r’s b
urde
n eq
uals
only
21
perc
ent o
f the
cor
pora
te ta
x re
venu
e. T
hat r
educ
tion
of 5
2 pe
rcen
t in
dom
estic
labo
r’s
burd
en is
alm
ost a
ll ex
porte
d to
fore
ign
resi
dent
s, w
hose
net
bur
den
then
equ
als 4
9 pe
rcen
t of t
he
dom
estic
cor
pora
te ta
x re
venu
e. I
f tra
de su
bstit
utio
n an
d ca
pita
l mob
ility
are
bot
h lo
w, d
omes
tic
labo
r will
bea
r alm
ost n
one
of th
e co
rpor
ate
inco
me
tax
burd
en.
In a
dditi
on to
dem
onst
ratin
g th
e po
tent
ial i
mpo
rtanc
e of
inte
rnat
iona
l mar
ket p
ower
,
Gra
velle
and
Sm
ette
rs sh
ow th
at th
e lo
ng-r
un in
cide
nce
of th
e co
rpor
ate
inco
me
tax
is h
ighl
y
unce
rtain
. A
lthou
gh e
mpi
rical
evi
denc
e ab
out t
he sh
ort-r
un d
egre
es o
f int
erna
tiona
l tra
de
subs
titut
ion
and
capi
tal m
obili
ty su
gges
t tha
t dom
estic
labo
r bea
rs a
lmos
t non
e of
the
burd
en o
f
the
corp
orat
e ta
x ac
cord
ing
to th
eir a
naly
sis,
it is
not
cle
ar w
hat s
houl
d be
ass
umed
abo
ut th
ose
para
met
ers f
or th
e lo
ng ru
n.
Har
berg
er (1
995)
mea
sure
s the
ope
n-ec
onom
y in
cide
nce
of th
e co
rpor
ate
inco
me
tax
by
anal
yzin
g a
sim
ple
gene
ral e
quili
briu
m m
odel
of d
omes
tic a
nd fo
reig
n ec
onom
ies t
hat e
ach
have
five
sect
ors.
In c
ontra
st to
Gra
velle
and
Sm
ette
rs, t
he c
orpo
rate
sect
or th
at p
rodu
ces
inte
rnat
iona
lly tr
adea
ble
good
s is f
urth
er su
bdiv
ided
into
two
subs
ecto
rs.
One
of t
hose
subs
ecto
rs p
rodu
ces g
oods
that
are
per
fect
subs
titut
es fo
r the
goo
ds p
rodu
ced
by th
e
corr
espo
ndin
g fo
reig
n se
ctor
. Th
e se
cond
cor
pora
te su
bsec
tor p
rodu
ces g
oods
that
are
impe
rfec
t
subs
titut
es fo
r goo
ds p
rodu
ced
by th
e co
rres
pond
ing
fore
ign
sect
or.
Oth
erw
ise,
that
ear
lier
mod
el in
Har
berg
er (1
995)
and
late
r ana
lyze
d in
Har
berg
er (2
006)
has
the
sam
e ba
sic
stru
ctur
e
as th
e m
odel
in G
rave
lle a
nd S
met
ters
.
Whe
n go
ods a
re p
rodu
ced
in b
oth
corp
orat
e tra
dabl
e go
ods s
ubse
ctor
s of t
he H
arbe
rger
(199
5) m
odel
, the
dom
estic
and
fore
ign
wag
es a
re d
eter
min
ed fu
lly b
y th
e ef
fect
s tha
t the
tax
has
-6-
on p
rodu
ctio
n co
sts w
ithin
the
first
subs
ecto
r. In
the
dom
estic
eco
nom
y, th
e co
rpor
ate
tax
driv
es
a w
edge
into
the
cost
of p
rodu
ctio
n in
the
corp
orat
e se
ctor
s. B
ecau
se th
e do
mes
tic e
cono
my
cann
ot a
ffec
t the
wor
ld p
rice
of o
utpu
t in
the
first
sect
or, t
he d
omes
tic w
age
mus
t dec
reas
e in
orde
r to
offs
et th
e in
crea
sed
corp
orat
e co
st o
f cap
ital.
Alth
ough
the
Har
berg
er (1
995)
mod
el sp
lits t
he c
orpo
rate
trad
able
sect
ors i
n th
at w
ay,
the
leve
l of s
ubst
ituta
bilit
y be
twee
n th
e do
mes
tic a
nd fo
reig
n ou
tput
s of t
he se
cond
cor
pora
te
trada
ble
sect
or c
an st
ill a
ffec
t the
inci
denc
e of
the
tax,
as i
n G
rave
lle a
nd S
met
ters
. B
ut, a
s
show
n in
this
stud
y, th
at tr
ade
effe
ct d
epen
ds u
pon
the
rela
tive
capi
tal i
nten
sitie
s of p
rodu
ctio
n
in th
e co
rpor
ate
trada
ble
sect
ors.
Whe
n th
e ca
pita
l int
ensi
ties a
re e
qual
, the
inci
denc
e of
the
tax
does
not
dep
end
at a
ll up
on th
e de
gree
of i
nter
natio
nal o
utpu
t sub
stitu
tabi
lity
in th
e se
cond
corp
orat
e tra
dabl
e se
ctor
.
This
stud
y ex
amin
es a
ver
sion
of H
arbe
rger
’s (1
995,
200
6) o
pen-
econ
omy
gene
ral
equi
libriu
m m
odel
. A
fter d
evel
opin
g th
e m
odel
and
ana
lyzi
ng th
e ec
onom
ic e
ffec
ts o
f the
corp
orat
e in
com
e ta
x, a
num
eric
al a
pplic
atio
n is
pre
sent
ed th
at u
ses o
utpu
t and
inpu
t sha
re
assu
mpt
ions
reas
onab
le fo
r the
Uni
ted
Stat
es.
The
appl
icat
ion
star
ts w
ith a
n as
sum
ptio
n th
at
capi
tal i
s per
fect
ly m
obile
inte
rnat
iona
lly.
It al
so a
ssum
es in
itial
ly th
at th
e de
gree
of
inte
rnat
iona
l out
put s
ubst
ituta
bilit
y do
es n
ot m
atte
r bec
ause
the
corp
orat
e tra
dabl
e se
ctor
s hav
e
equa
l out
put c
apita
l int
ensi
ties.
Tho
se a
ssum
ptio
ns a
re re
laxe
d la
ter i
n th
e ap
plic
atio
n.
This
stud
y ex
amin
es c
orpo
rate
tax
inci
denc
e bo
th a
lone
and
in c
ompa
rison
to se
vera
l
repl
acem
ent t
axes
: a g
ener
al ta
x on
the
inco
me
from
cap
ital i
n al
l dom
estic
sect
ors,
a do
mes
tic
wag
e ta
x, a
tax
on th
e w
orld
wid
e ca
pita
l inc
ome
of th
e do
mes
tic o
wne
rs o
f cap
ital,
and
a
unifo
rm d
omes
tic ta
x on
per
sona
l inc
ome
or c
onsu
mpt
ion.
The
mod
el is
als
o us
ed to
exa
min
e
Page 106
-7-
the
inte
rnat
iona
l bur
dens
of t
he c
orpo
rate
inco
me
tax
unde
r alte
rnat
ive
assu
mpt
ions
: ab
out
whe
ther
the
coun
try is
a n
et in
tern
atio
nal b
orro
wer
or n
et in
tern
atio
nal l
ende
r, ab
out t
he re
lativ
e
capi
tal i
nten
sitie
s of p
rodu
ctio
n in
the
corp
orat
e tra
dabl
e se
ctor
s, ab
out t
he si
ze o
f the
dom
estic
econ
omy
rela
tive
to th
e re
st o
f the
wor
ld, a
nd a
bout
the
degr
ee o
f int
erna
tiona
l cap
ital m
obili
ty.
A la
ter s
ectio
n al
so e
xam
ines
how
the
tax
burd
ens a
re a
ffec
ted
whe
n m
any
coun
tries
impo
se
corp
orat
e in
com
e ta
xes a
nd m
ay e
ngag
e in
inte
rnat
iona
l tax
com
petit
ion.
An
appe
ndix
furth
er
exam
ines
Har
berg
er (1
995)
, Har
berg
er (2
006)
, and
Gra
velle
and
Sm
ette
rs.
II.
The
Mod
el
The
wor
ld c
onsi
sts o
f tw
o co
untri
es.
In a
n in
itial
equ
ilibr
ium
, bot
h ec
onom
ies a
re
iden
tical
exc
ept f
or si
ze.
For e
ach
econ
omy,
pro
duct
ion
is d
ivid
ed in
to fi
ve se
ctor
s tha
t eac
h
prod
uce
good
s or s
ervi
ces u
sing
labo
r, ca
pita
l, an
d (f
or a
gric
ultu
re) l
and.
All
prod
uctio
n
tech
nolo
gies
are
cha
ract
eriz
ed b
y co
nsta
nt re
turn
s to
scal
e; p
rodu
ctio
n fu
nctio
ns a
re tw
ice-
diff
eren
tiabl
e an
d co
ncav
e; c
ompe
titio
n is
per
fect
at t
he le
vel o
f the
pro
duce
r.
The
first
thre
e se
ctor
s are
cor
pora
te.
Sect
or o
ne p
rodu
ces i
nter
natio
nally
trad
eabl
e
outp
uts f
or w
hich
the
fore
ign
and
dom
estic
pro
duct
s are
per
fect
dem
and
subs
titut
es.
The
outp
ut
from
that
sect
or is
the
num
erai
re.
Sect
or tw
o pr
oduc
es in
tern
atio
nally
trad
eabl
e ou
tput
s for
whi
ch th
e fo
reig
n an
d do
mes
tic p
rodu
cts a
re n
ot p
erfe
ct d
eman
d su
bstit
utes
. Se
ctor
thre
e
prod
uces
non
-inte
rnat
iona
lly tr
adab
le o
utpu
ts fo
r whi
ch c
onsu
mpt
ion
mus
t occ
ur in
the
sam
e
coun
try a
s pro
duct
ion;
exa
mpl
es in
clud
e ut
ilitie
s and
tran
spor
tatio
n se
rvic
es.
7 The
ana
lysi
s thu
s abs
tract
s fro
m th
e ef
fect
s tha
t the
cor
pora
te ta
x m
ay h
ave
on ta
x in
cide
nce
thro
ugh
its e
ffec
t on
indi
vidu
al sa
ving
s, th
e ca
pita
l sto
ck, a
nd, u
ltim
atel
y, la
bor p
rodu
ctiv
ity a
nd th
e re
turn
to c
apita
l (se
e Fu
llerto
n an
dM
etca
lf, 2
002,
pp.
183
2-18
44).
-8-
Sect
ors f
our a
nd fi
ve a
re n
onco
rpor
ate
sect
ors.
Sec
tor f
our p
rodu
ces i
nter
natio
nally
trade
able
agr
icul
tura
l pro
duct
s. S
ecto
r fiv
e pr
oduc
es o
utpu
ts th
at a
re n
ot in
tern
atio
nally
trade
able
, suc
h as
resi
dent
ial h
ousi
ng a
nd re
tail
serv
ices
.
Labo
r is h
omog
eneo
us a
nd p
erfe
ctly
mob
ile w
ithin
eac
h co
untry
, but
can
not m
ove
betw
een
coun
tries
. Th
us, t
he w
age
rate
is th
e sa
me
for e
very
sect
or w
ithin
a c
ount
ry, b
ut c
an
diff
er b
etw
een
coun
tries
. In
divi
dual
s do
not v
ary
thei
r am
ount
of l
abor
supp
lied
to th
e m
arke
t.
The
wor
ldw
ide
supp
ly o
f cap
ital i
s fix
ed b
ut p
erfe
ctly
mob
ile b
etw
een
coun
tries
in th
at
the
geog
raph
ic lo
catio
n of
inve
stm
ent d
oes n
ot m
atte
r to
a m
argi
nal i
nves
tor.
The
mar
gina
l
retu
rn to
inve
stm
ent i
s the
sam
e ev
eryw
here
in e
quili
briu
m, e
xclu
ding
pro
duce
r-le
vel t
axes
on
capi
tal i
ncom
e. C
apita
l ow
ners
can
ow
n ca
pita
l in
eith
er c
ount
ry, b
ut c
anno
t the
mse
lves
relo
cate
abro
ad.
Each
ow
ns a
fixe
d sh
are
of th
e w
orld
cap
ital s
tock
.7
Con
sum
ers h
ave
iden
tical
hom
othe
tic p
refe
renc
es a
nd m
ust c
onsu
me
whe
re th
ey li
ve.
They
can
cho
ose
from
am
ong
the
five
type
s of o
utpu
ts p
rodu
ced
in th
eir o
wn
coun
try (o
r
impo
rted
from
the
othe
r cou
ntry
in th
e ca
se o
f out
puts
from
sect
ors o
ne a
nd fo
ur) a
nd im
ports
of
the
uniq
ue o
utpu
t fro
m se
ctor
two
of th
e ot
her c
ount
ry.
Initi
al c
onsu
mer
exp
endi
ture
s on
the
six
type
s of g
oods
and
serv
ices
are
pro
porti
onal
to th
e in
itial
shar
es o
f wor
ldw
ide
prod
uctio
n.
The
dom
estic
gov
ernm
ent c
olle
cts t
axes
and
mak
es lu
mp-
sum
dis
tribu
tions
. In
ord
er to
isol
ate
the
effe
cts o
f the
cor
pora
te in
com
e ta
x, th
e go
vern
men
t’s o
ther
pol
icie
s are
ass
umed
to
affe
ct n
eith
er e
cono
mic
eff
icie
ncy
nor t
he d
istri
butio
n of
inco
me.
With
any
ava
ilabl
e ta
x
reve
nues
, the
dom
estic
gov
ernm
ent p
urch
ases
the
six
avai
labl
e va
rietie
s of c
onsu
mer
goo
ds
acco
rdin
g to
the
sam
e ex
pend
iture
shar
es a
s dom
estic
con
sum
ers.
The
gov
ernm
ent r
edis
tribu
tes
Page 107
8 A la
ter s
ectio
n of
this
pap
er, i
n an
exa
min
atio
n of
tax
com
petit
ion,
dis
cuss
es h
ow th
e re
sults
app
ly w
hen
othe
rco
untri
es a
lso
have
cor
pora
te in
com
e ta
xes a
nd m
ay c
hang
e th
eir t
axes
sim
ulta
neou
sly.
9 Ful
lerto
n an
d M
etca
lf (2
002)
show
how
such
com
para
tive
stat
ic lo
g-lin
ear e
quili
briu
m re
latio
nshi
ps c
an b
ede
rived
for a
two-
sect
or c
lose
d ec
onom
y un
der t
he a
ssum
ptio
ns o
f thi
s mod
el.
The
expr
essi
on u
sed
here
for t
hepe
rcen
tage
cha
nge
in th
e co
st o
f cap
ital i
n th
e ta
xed
sect
or d
iffer
s slig
htly
from
thei
r cor
resp
ondi
ng te
rm,
,r
beca
use
the
term
in (1
a) a
llow
s for
a d
iscr
ete
finite
cha
nge
in th
e ta
x ra
te.
The
term
use
d in
(1a)
con
verg
es to
the
term
use
d by
Ful
lerto
n an
d M
etca
lf as
the
tax
rate
app
roac
hes z
ero.
-9-
that
bun
dle
of c
omm
oditi
es to
dom
estic
resi
dent
s in
prop
ortio
n to
thei
r inc
omes
. Th
e fo
reig
n
gove
rnm
ent d
oes n
ot re
spon
d to
any
tax
polic
ies c
hose
n by
the
dom
estic
gov
ernm
ent.8
III.
The
Cor
pora
te In
com
e T
ax
Star
ting
in a
wor
ld e
quili
briu
m w
ith n
o co
rpor
ate
taxe
s, th
e do
mes
tic g
over
nmen
t
intro
duce
s a sm
all t
ax o
n ca
pita
l inc
ome
from
dom
estic
pro
duct
ion
with
in th
e co
rpor
ate
sect
ors.
The
tax
is im
pose
d at
a ta
x-ex
clus
ive
rate
of
per
cent
. Th
at is
the
perc
enta
ge b
y w
hich
the
tax
c
initi
ally
incr
ease
s the
cor
pora
te c
ost o
f cap
ital a
bove
its i
nitia
l equ
ilibr
ium
val
ue
so th
at th
er,
corp
orat
e co
st o
f cap
ital e
qual
s T
he e
quili
briu
m v
alue
of
can
chan
ge a
s a re
sult
ofr
c(
).1
r
the
econ
omic
resp
onse
s to
the
tax.
In
a ne
w e
quili
briu
m, s
tarti
ng fr
om a
tax
rate
of z
ero,
the
corp
orat
e co
st o
f cap
ital i
ncre
ases
by
per
cent
, whe
re a
circ
umfle
x ov
er a
var
iabl
e(
)r
rc
1
indi
cate
s the
per
cent
age
by w
hich
that
var
iabl
e ch
ange
s to
its n
ew e
quili
briu
m v
alue
. Th
e
equi
libriu
m c
ost o
f cap
ital o
utsi
de th
e do
mes
tic c
orpo
rate
sect
or c
hang
es b
y pe
rcen
t. r
Com
petit
ion
in se
ctor
one
det
erm
ines
how
cha
nges
in th
e co
st o
f cap
ital a
ffec
t the
fore
ign
and
dom
estic
wag
e ra
tes i
n eq
uilib
rium
. B
ecau
se th
e pr
oduc
tion
tech
nolo
gy is
cha
ract
eriz
ed b
y
cons
tant
retu
rns t
o sc
ale
and
beca
use
com
petit
ion
is p
erfe
ct a
t the
pro
duce
r lev
el, a
ny c
hang
es in
the
pric
es o
f out
put i
n ea
ch se
ctor
mus
t be
rela
ted
prop
ortio
nally
to c
hang
es in
the
cost
of
inpu
ts.9
For s
ecto
r one
, tha
t rel
atio
nshi
p is
giv
en b
y:
-10-
(a)
[
()
]p
wr
rd
Ld
Kc
11
10
1
(1)
(b)
p
wr
fL
fK
11
10
whe
re
is th
e ou
tput
pric
e,
and
a
re th
e la
bor a
nd c
apita
l sha
res o
f val
ue a
dded
inp
j 1L1
K1
sect
or o
ne, a
ndis
the
wag
e ra
te in
cou
ntry
j(w
hich
can
indi
cate
d, d
omes
tic, o
r f, f
orei
gn).
wj
The
pric
e of
sect
or o
ne o
utpu
t rem
ains
con
stan
t bec
ause
sect
or o
ne p
rodu
ces t
he n
umer
aire
, and
the
fore
ign
and
dom
estic
out
puts
from
that
sect
or a
re id
entic
al.
Thus
, any
cha
nge
in th
e co
st o
f
capi
tal f
or se
ctor
one
in c
ount
ry m
ust b
e fu
lly o
ffse
t by
a w
age
rate
cha
nge
in th
at c
ount
ry.
j
Rec
ogni
zing
that
the
outp
ut p
rice
does
not
cha
nge,
re-a
rran
gem
ent o
f (1a
) and
(1b)
yie
lds t
he
follo
win
g eq
uatio
ns fo
r the
equ
ilibr
ium
cha
nges
in d
omes
tic a
nd fo
reig
n w
age
rate
s:
(a)
[
()
]w
rr
dK L
c1 1
1
(2)
(b)
w
rf
K L1 1
Acc
ordi
ng to
(2a)
, any
incr
ease
in th
e do
mes
tic c
orpo
rate
cos
t of c
apita
l for
sect
or o
ne w
ill c
ause
the
dom
estic
wag
e ra
te to
fall.
Acc
ordi
ng to
(2b)
, any
dec
reas
es in
the
fore
ign
cost
of c
apita
l for
sect
or o
ne w
ill c
ause
the
fore
ign
wag
e ra
te to
rise
. Th
e si
zes o
f tho
se w
age
rate
cha
nges
will
depe
nd u
pon
the
capi
tal i
nten
sity
of s
ecto
r one
pro
duct
ion
and
the
amou
nt o
f cha
nge
in th
e
corp
orat
e co
st o
f cap
ital.
Whe
n th
e ca
pita
l int
ensi
ty o
f sec
tor o
ne p
rodu
ctio
n is
low
er, t
he w
age
rate
doe
s not
hav
e to
cha
nge
by a
s muc
h fo
r the
resu
lting
cha
nge
in w
age
cost
s to
fully
off
set t
he
chan
ge in
the
cost
of c
apita
l.
Page 108
10 F
or c
apita
l and
labo
r dem
ands
, the
subs
crip
ts C
and
N re
pres
ent a
ggre
gate
am
ount
s for
all
corp
orat
e se
ctor
s and
nonc
orpo
rate
sect
ors,
resp
ectiv
ely.
The
abs
ence
of a
subs
crip
t rep
rese
nts a
n ag
greg
ate
over
all
sect
ors.
The
abs
ence
of a
supe
rscr
ipt r
epre
sent
s an
aggr
egat
e ov
er b
oth
coun
tries
.11
Equ
atio
n (4
) can
als
o be
exp
ress
ed in
term
s of t
he in
put s
hare
s alo
ne.
It w
ould
be
easy
to d
eriv
e a
varia
tion
ofeq
uatio
n (4
) tha
t allo
ws t
he c
orpo
rate
and
non
corp
orat
e se
ctor
s to
have
diff
eren
t inp
ut su
bstit
utio
n el
astic
ities
.
-11-
The
fact
that
the
tax
caus
es th
e re
lativ
e pr
ices
of t
he c
apita
l and
labo
r inp
uts t
o ch
ange
impl
ies t
hat p
rodu
cers
will
subs
titut
e be
twee
n th
eir d
eman
ds fo
r cap
ital a
nd la
bor.
Tha
t inp
ut
subs
titut
ion
caus
es th
e eq
uilib
rium
dem
ands
for c
apita
l and
labo
r to
chan
ge a
ccor
ding
to
(a)
[(
)]
KL
wr
rCd
CdCd
dc
1
(3)
(b)
(
)K
Lw
rNd
NdNd
d
(c)
(
)K
Lw
rf
ff
f
whe
re a
nd
are
the
capi
tal a
nd la
bor s
tock
s and
is th
e pa
rtial
ela
stic
ity o
f sub
stitu
tion
Kij
L ijij
betw
een
capi
tal a
nd la
bor i
n se
ctor
i of
cou
ntry
j.10
Toge
ther
, the
rela
tions
hips
in (2
) and
(3) d
eter
min
e th
e eq
uilib
rium
cha
nge
in
Rec
all
r.
that
the
aggr
egat
e su
pply
of l
abor
is fi
xed
in e
ach
coun
try a
nd th
at th
e su
pply
of c
apita
l is f
ixed
wor
ldw
ide.
Bas
ed o
n th
ose
cond
ition
s, as
sum
ing
that
the
inpu
t sub
stitu
tion
elas
ticiti
es a
re
iden
tical
in a
ll se
ctor
s and
cou
ntrie
s, (2
) and
(3) i
mpl
y th
at th
e ch
ange
in th
e eq
uilib
rium
is r
give
n by
(4).11
(4)
()
rK
KK
KK
c
dL
Nd
dL
Ndc
1
1
Equa
tion
(4) i
mpl
ies t
hat t
he c
hang
e in
is
det
erm
ined
by
the
rela
tive
size
of t
her
dom
estic
eco
nom
y an
d th
e si
ze o
f the
dom
estic
cor
pora
te se
ctor
. W
hen
the
dom
estic
cor
pora
te
sect
or is
smal
l com
pare
d w
ith th
e re
st o
f the
wor
ld e
cono
my,
the
equi
libriu
m v
alue
of
will
r
12 W
hen
the
dom
estic
cor
pora
te se
ctor
mak
es u
p th
e en
tire
dom
estic
eco
nom
y an
d th
e ta
x ra
te is
ver
y sm
all,
equa
tion
(4) i
s the
sam
e as
a re
latio
nshi
p de
rived
by
Bra
dfor
d (1
978)
and
Kot
likof
f and
Sum
mer
s (19
86).
Tha
tva
riant
is d
iscu
ssed
in a
late
r sec
tion
of th
is st
udy.
13
In
deriv
atio
n of
(4),
the
equi
libriu
m c
ondi
tions
are
met
thro
ugh
chan
ges i
n th
e ca
pita
l allo
catio
ns a
lone
. Th
em
odel
impl
ies t
hat t
he la
bor d
eman
ds d
o no
t cha
nge
in re
spon
se to
the
tax.
-12-
decr
ease
by
only
a sm
all p
erce
ntag
e. I
n th
e lim
it,w
ill n
ot c
hang
e w
hen
the
dom
estic
eco
nom
yr
or c
orpo
rate
sect
or is
ver
y sm
all,
so th
e co
st o
f cap
ital i
n th
e do
mes
tic c
orpo
rate
sect
or,
, w
ill in
crea
se b
y ap
prox
imat
ely
per
cent
. C
onve
rsel
y, w
hen
the
dom
estic
rc
()
1c
corp
orat
e se
ctor
is v
ery
larg
e co
mpa
red
with
to th
e w
orld
eco
nom
y,
will
dec
reas
e by
a la
rge
r
perc
enta
ge, a
nd th
e co
st o
f cap
ital i
n th
e do
mes
tic c
orpo
rate
sect
or w
ill in
crea
se b
y su
bsta
ntia
lly
less
than
p
erce
nt.12
c
As a
bas
ic e
cono
mic
inte
rpre
tatio
n of
(4),
whe
n th
e re
lativ
e co
st o
f cap
ital i
ncre
ases
in th
e
dom
estic
cor
pora
te se
ctor
s and
dec
reas
es in
the
dom
estic
non
corp
orat
e se
ctor
s and
abr
oad,
dom
estic
cor
pora
te p
rodu
cers
dem
and
rela
tivel
y le
ss c
apita
l. T
he n
onco
rpor
ate
dom
estic
prod
ucer
s and
all
fore
ign
prod
ucer
s dem
and
rela
tivel
y m
ore
capi
tal.
As a
resu
lt, th
e ca
pita
l
inte
nsiti
es o
f pro
duct
ion
incr
ease
in th
ose
latte
r sec
tors
and
the
mar
gina
l pro
duct
ivity
of c
apita
l
decr
ease
s in
thos
e se
ctor
s. S
uch
chan
ges c
ause
the
mar
gina
l ret
urn
to in
vest
men
t, , t
o fa
ll in
r
thos
e ot
her s
ecto
rs.13
The
mar
gina
l ret
urn
falls
by
mor
e w
hen
the
dom
estic
eco
nom
y an
d th
e
dom
estic
cor
pora
te se
ctor
are
larg
er re
lativ
e to
the
rest
of t
he w
orld
. Th
at h
appe
ns b
ecau
se a
ny
give
n pe
rcen
tage
redu
ctio
n in
the
dom
estic
cor
pora
te c
apita
l sto
ck c
orre
spon
ds in
that
cas
e to
a
larg
er in
crea
se in
cap
ital/l
abor
ratio
s of t
he d
omes
tic n
onco
rpor
ate
and
fore
ign
sect
ors.
The
capi
tal i
nten
sity
of p
rodu
ctio
n in
sect
or o
ne e
nter
s (4)
bec
ause
any
real
loca
tion
of
capi
tal o
ut o
f the
dom
estic
cor
pora
te se
ctor
is o
ffse
t, so
mew
hat,
by th
e fa
ct th
at th
e do
mes
tic
wag
e ra
te fa
lls w
here
as th
e fo
reig
n w
age
rate
rise
s. A
s a re
sult,
the
dom
estic
non
corp
orat
e
prod
ucer
s do
not i
ncre
ase
thei
r dem
and
for c
apita
l by
as m
uch,
pro
porti
onal
ly, a
s do
the
fore
ign
Page 109
14 T
he a
dditi
onal
fixe
d fa
ctor
, lan
d, is
incl
uded
in th
e m
odel
as a
n in
put i
n se
ctor
four
to a
void
a c
orne
r sol
utio
n.
Oth
erw
ise,
whe
n re
spon
ses t
o th
e co
rpor
ate
tax
driv
e do
wn
both
the
wag
e an
d th
e co
st o
f cap
ital f
or th
at se
ctor
, all
dom
estic
pro
duce
rs w
ould
wan
t to
prod
uce
only
that
out
put.
-13-
prod
ucer
s. T
he d
omes
tic n
onco
rpor
ate
prod
ucer
s will
eve
n de
crea
se th
eir d
eman
d fo
r cap
ital i
f
the
dom
estic
eco
nom
y is
ver
y sm
all r
elat
ive
to th
e re
st o
f the
wor
ld o
r if p
rodu
ctio
n in
sect
or o
ne
is v
ery
capi
tal i
nten
sive
. Th
e im
porta
nce
of su
ch a
reac
tion
by th
e do
mes
tic n
onco
rpor
ate
prod
ucer
s is r
epre
sent
ed in
(4) b
y th
e in
tera
ctio
n be
twee
n th
e do
mes
tic n
onco
rpor
ate
capi
tal
stoc
k an
d th
e te
rm th
at re
pres
ents
labo
r’s s
hare
of v
alue
add
ed in
sect
or o
ne.
Cha
nges
in th
e la
nd re
nts a
re d
eter
min
ed in
sect
or fo
ur, t
he a
gric
ultu
ral s
ecto
r. F
ollo
win
g
Har
berg
er (1
995)
, it i
s ass
umed
her
e th
at th
e do
mes
tic c
ount
ry d
oes n
ot p
rodu
ce e
noug
h to
aff
ect
the
wor
ld p
rice
of o
utpu
t in
that
sect
or.14
Bec
ause
sect
or fo
ur u
ses l
abor
, cap
ital,
and
land
in
prod
uctio
n, a
ny c
hang
es in
the
net c
osts
of c
apita
l and
labo
r are
off
set b
y ch
ange
s in
the
land
rent
s. T
he c
hang
es in
dom
estic
and
fore
ign
equi
libriu
m la
nd re
nts a
re d
eriv
ed fr
om th
e re
latio
n
betw
een
inpu
t cos
ts a
nd o
utpu
t pric
es in
sect
or fo
ur, a
s rep
rese
nted
by:
(5)
pw
rj
Lj
Kj
44
44
0j
df,
whe
re
is t
he la
nd re
nt in
cou
ntry
and
is
land
’s sh
are
of v
alue
add
ed in
sect
or fo
ur.
jj
4
Bec
ause
the
pric
e of
sect
or fo
ur o
utpu
t doe
s not
cha
nge,
the
chan
ge in
the
dom
estic
and
fore
ign
land
rent
s is d
eriv
ed fr
om (5
) as:
(6)
jL
jK
wr
4 4
4 4j
df,
-14-
The
dom
estic
land
rent
incr
ease
s in
resp
onse
to th
e co
rpor
ate
inco
me
tax
beca
use
the
tax
caus
es a
dec
reas
e in
bot
h th
e co
st o
f lab
or a
nd th
e co
st o
f cap
ital u
sed
by th
e no
ncor
pora
te
prod
ucer
s. In
con
trast
, the
fore
ign
land
rent
s can
rise
or f
all d
epen
ding
on
how
the
capi
tal
inte
nsity
of p
rodu
ctio
n in
sect
or fo
ur c
ompa
res w
ith th
e ca
pita
l int
ensi
ty o
f pro
duct
ion
in se
ctor
one.
Bec
ause
the
size
of t
he in
crea
se in
fore
ign
labo
r cos
ts a
nd d
ecre
ase
in fo
reig
n ca
pita
l cos
ts
are
cons
iste
nt w
ith a
con
stan
t pric
e of
sect
or o
ne o
utpu
t, fo
reig
n la
nd re
nts w
ill in
crea
se o
r
decr
ease
dep
endi
ng o
n w
heth
er se
ctor
four
pro
duct
ion
is le
ss o
r mor
e ca
pita
l-int
ensi
ve th
an
sect
or o
ne p
rodu
ctio
n.
Out
put p
rices
cha
nge
in se
ctor
s tw
o an
d th
ree,
the
othe
r cor
pora
te se
ctor
s, ac
cord
ing
to:
(a)
[
()
]p
wr
rid
Lid
Kic
1(7
)i
23,
(b)
p
wr
ifLi
fK
i
For b
oth
dom
estic
and
fore
ign
prod
ucer
s in
sect
ors t
wo
and
thre
e, th
e in
put p
rices
cha
nge
by th
e sa
me
perc
enta
ges a
s the
inpu
t pric
es fa
ced
by p
rodu
cers
in se
ctor
one
. B
ecau
se th
e
dom
estic
wag
e ra
te fa
lls a
nd th
e do
mes
tic c
orpo
rate
cos
t of c
apita
l ris
es, t
he d
omes
tic p
rices
of
outp
ut in
sect
ors t
wo
and
thre
e w
ill in
crea
se o
r dec
reas
e de
pend
ing
upon
whe
ther
pro
duct
ion
in
thos
e se
ctor
s is m
ore
or le
ss c
apita
l-int
ensi
ve th
an p
rodu
ctio
n in
sect
or o
ne.
In th
e fo
reig
n
coun
try, t
he p
rices
of o
utpu
ts fr
om se
ctor
s tw
o an
d th
ree
have
the
reve
rse
rela
tions
hip
to th
e
capi
tal i
nten
sity
of p
rodu
ctio
n in
sect
or o
ne b
ecau
se th
e fo
reig
n w
age
rate
goe
s up
and
the
fore
ign
cost
of c
apita
l goe
s dow
n by
the
sam
e am
ount
s in
all s
ecto
rs.
The
fore
ign
outp
ut p
rices
in se
ctor
s tw
o an
d th
ree
will
ther
efor
e in
crea
se if
pro
duct
ion
in th
ose
sect
ors i
s les
s cap
ital-
inte
nsiv
e th
an p
rodu
ctio
n in
sect
or o
ne.
Thos
e fo
reig
n pr
ices
will
dec
reas
e if
prod
uctio
n in
thos
e
sect
ors i
s mor
e ca
pita
l-int
ensi
ve th
an p
rodu
ctio
n in
sect
or o
ne.
Page 110
-15-
For b
oth
coun
tries
, the
pric
e ch
ange
s for
the
outp
uts o
f sec
tor f
ive
are
give
n by
:
(8)
pw
rj
Lj
K5
55
jd
f,
The
pric
e of
the
dom
estic
out
put o
f sec
tor f
ive
will
dec
reas
e be
caus
e th
e do
mes
tic n
onco
rpor
ate
cost
s of b
oth
labo
r and
cap
ital i
nput
s fal
l. T
he fo
reig
n pr
ice
of th
e ou
tput
of s
ecto
r fiv
e be
have
s
in th
e sa
me
way
as t
he fo
reig
n ou
tput
pric
es fo
r sec
tors
two
and
thre
e: W
heth
er th
e fo
reig
n pr
ice
of se
ctor
five
out
put w
ill d
ecre
ase
or in
crea
se d
epen
ds o
n w
heth
er p
rodu
ctio
n in
sect
or fi
ve is
mor
e or
less
cap
ital i
nten
sive
than
pro
duct
ion
in se
ctor
one
.
IV.
Tax
Bur
dens
Bec
ause
indi
vidu
als c
onsu
me
all o
f the
ir in
com
es a
nd b
ecau
se th
e in
divi
dual
supp
lies o
f
labo
r and
cap
ital a
re fi
xed,
the
tota
l bur
den
of th
e co
rpor
ate
inco
me
tax
can
be m
easu
red
in te
rms
of th
e ch
ange
s it c
ause
s to
pers
onal
inco
mes
, adj
uste
d fo
r any
wel
fare
eff
ects
of c
hang
es in
the
rela
tive
pric
es o
f con
sum
er g
oods
. F
or th
e re
side
nts o
f eac
h co
untry
, per
sona
l inc
ome
can
be
deco
mpo
sed
as in
(9),
whe
re th
e in
itial
val
ue o
f dom
estic
out
put i
s arb
itrar
ily se
t equ
al to
1:
(9)
Yw
Lr
KY
YY
jj
jj
jLj
Kjj
jd
f,
whe
re
, , a
nd a
re th
e am
ount
s of i
ncom
eY
K KLj
L
j dY
K KKj
Kj
dY
K Kj
j d
paid
to th
e re
side
nt o
wne
rs o
f inc
ome
from
labo
r, ca
pita
l, an
d la
nd, r
espe
ctiv
ely,
in c
ount
ry j.
The
term
is
the
shar
e of
the
wor
ldw
ide
capi
tal s
tock
ow
ned
by re
side
nts o
f cou
ntry
j, a
nd
,j
L
, and
ar
e th
e in
itial
agg
rega
te o
utpu
t sha
res f
or la
bor,
capi
tal,
and
land
, res
pect
ivel
y. T
heK
15
The
num
eric
al a
pplic
atio
ns in
this
stud
y us
e th
e La
spey
res i
ndex
, whi
ch c
an c
ause
the
estim
ated
exc
ess b
urde
nsof
the
tax
to b
e ov
erst
ated
. Th
at b
ias d
isap
pear
s whe
n th
e ta
x ra
te is
ver
y sm
all,
in w
hich
cas
e th
e ex
cess
bur
den
ofth
e ta
x al
so a
ppro
ache
s zer
o.
-16-
tota
l bur
den
of th
e ta
x is
exp
ress
ed in
term
s of c
hang
es in
per
sona
l wag
e in
com
e, c
apita
l inc
ome,
labo
r inc
ome,
and
the
pric
es o
f con
sum
er g
oods
as:
(10)
Bd
Y PY
wY
rY
PY
jj j
Ljj
Kjj
jj
jj
df,
whe
re
initi
ally
equ
al to
1, i
s an
inde
x of
the
cost
of l
ivin
g in
cou
ntry
j.P
j ,
The
inte
ract
ion
betw
een
pers
onal
inco
me
and
the
chan
ge in
the
pric
e in
dex
in th
e la
st
term
of (
10) a
ccou
nts f
or a
con
sum
er b
urde
n th
at re
sults
from
cha
nges
in th
e re
lativ
e pr
ices
of
cons
umer
goo
ds.
Tax
burd
en is
def
ined
her
e as
an
equi
vale
nt v
aria
tion,
so th
e pr
ice
inde
x
mea
sure
s the
equ
ival
ent v
aria
tion
in c
onsu
mer
exp
endi
ture
whe
n co
nsum
er p
rices
cha
nge.
The
inde
x ac
coun
ts fo
r cha
nges
in th
e re
lativ
e pr
ices
of c
onsu
mer
goo
ds a
nd a
ny c
onsu
mer
subs
titut
ion
that
occ
urs i
n re
spon
se to
thos
e pr
ice
chan
ges.
Tha
t tru
e co
st-o
f-liv
ing
inde
x ca
n be
appr
oxim
ated
by
the
chan
ge in
a fi
xed-
shar
e La
spey
res p
rice
inde
x:
(11)
Ps
ps
pj
iij
j
i6
215
jd
f,
whe
re
is t
he in
itial
exp
endi
ture
shar
e fo
r con
sum
er g
ood
i, th
e j s
uper
scrip
t rep
rese
nts t
hes i
coun
try o
f res
iden
ce, a
nd th
e -j
supe
rscr
ipt r
epre
sent
s the
oth
er c
ount
ry.15
Equa
tion
(10)
show
s how
the
tota
l bur
den
can
be d
ecom
pose
d ac
cord
ing
to th
e so
urce
s
and
uses
of i
ncom
e. T
hat d
ecom
posi
tion
is c
onsi
sten
t with
the
way
that
tax
inci
denc
e is
mea
sure
d in
Har
berg
er (1
962)
and
Har
berg
er (1
995)
. If
con
sum
ers h
ave
iden
tical
hom
othe
tic
pref
eren
ces a
nd if
they
face
the
sam
e ch
ange
s in
cons
umer
pric
es, t
he e
ffec
t of t
he ta
x on
the
Page 111
16 T
he te
rm “
real
” is
use
d he
re m
erel
y to
repr
esen
t the
adj
ustm
ent f
or c
hang
es in
rela
tive
pric
es.
-17-
dist
ribut
ion
of in
com
e is
inde
pend
ent o
f the
con
sum
er’s
bur
den.
For
exa
mpl
e, th
e ch
ange
in re
al
dom
estic
labo
r inc
ome,
exp
ress
ed a
s a fr
actio
n of
real
dom
estic
inco
me,
is in
depe
nden
t of t
he
cons
umer
’s b
urde
n.16
Alte
rnat
ivel
y, th
e co
nsum
er’s
bur
den
can
be d
ivid
ed b
etw
een
the
owne
rs o
f eac
h fa
ctor
acco
rdin
g to
(12)
, whi
ch c
ombi
nes t
he e
ffec
ts o
f the
tax
on th
e so
urce
s and
use
s of i
ncom
e.
(12)
BY
wP
Yr
PY
Pj
Ljj
jKj
jj
j(
)(
)(
)j
df,
Thos
e co
mbi
ned
mea
sure
s of b
urde
n ha
ve a
cle
ar in
tuiti
ve e
cono
mic
inte
rpre
tatio
n th
at
does
not
dep
end
on th
e ch
oice
of a
num
erai
re.
Def
ined
in th
at w
ay, b
urde
n ca
n be
thou
ght o
f as
the
chan
ge in
con
sum
ptio
n by
the
owne
rs o
f eac
h in
put.
For
the
owne
rs o
f eac
h fa
ctor
, it
mea
sure
s the
size
of a
lum
p-su
m ta
x to
war
d w
hich
thos
e ow
ners
wou
ld b
e in
diff
eren
t.
Con
sist
ent w
ith H
arbe
rger
(200
6) a
nd G
rave
lle a
nd S
met
ters
(200
6), t
he c
ombi
ned
mea
sure
s of b
urde
n in
(12)
are
use
d th
roug
hout
the
rest
of t
his s
tudy
. In
add
ition
to h
avin
g a
clea
r wel
fare
inte
rpre
tatio
n, th
e co
mbi
ned
mea
sure
s are
nee
ded
in o
rder
to m
ake
inte
rnat
iona
l
com
paris
ons b
etw
een
the
burd
ens i
mpo
sed
on d
omes
tic a
nd fo
reig
n re
side
nts.
Tha
t com
bina
tion
is n
eces
sary
bec
ause
fore
ign
and
dom
estic
resi
dent
s can
face
diff
eren
t cha
nges
in c
onsu
mer
pric
es w
hen
som
e ou
tput
s are
not
trad
ed in
tern
atio
nally
.
Exce
ss b
urde
n is
the
exce
ss o
f the
tota
l bur
den
over
the
real
val
ue o
f cor
pora
te ta
x
reve
nue:
(13)
Rr
Kq
PC
cCd
iKi
d
i[
()
()
]/(
)1
11
13
17 R
even
ue is
thus
mea
sure
d in
uni
ts o
f a b
undl
e of
dom
estic
con
sum
er g
oods
rath
er th
an in
term
s of t
he n
umer
aire
good
pro
duce
d in
sect
or o
ne.
Thus
, rev
enue
and
bur
den
are
mea
sure
d in
the
sam
e un
its.
Exce
ss b
urde
n is
then
sim
ply
any
exce
ss o
f tot
al b
urde
n ov
er th
e va
lue
of th
e lu
mp-
sum
gov
ernm
ent d
istri
butio
ns fi
nanc
ed b
y th
e ta
x.18
Bot
h ta
xes a
re re
ferr
ed to
as t
axes
“at
sour
ce”
beca
use
they
are
impo
sed
on c
apita
l inc
ome
base
d on
whe
re th
eca
pita
l is u
sed.
-18-
whe
re
is th
e in
itial
val
ue a
dded
by
prod
uctio
n in
sect
or i
and
the
sum
med
term
equ
als t
heq i
initi
al d
omes
tic c
orpo
rate
cap
ital s
tock
, all
expr
esse
d as
a sh
are
of th
e to
tal v
alue
of d
omes
tic
outp
ut.
The
real
val
ue o
f cor
pora
te re
venu
e eq
uals
the
real
val
ue o
f gov
ernm
ent p
urch
ases
of
dom
estic
con
sum
er g
oods
that
can
be
finan
ced
by th
e ta
x an
d re
dist
ribut
ed to
dom
estic
resi
dent
s.17
V.
A G
ener
al R
epla
cem
ent T
ax o
n th
e D
omes
tic U
se o
f Cap
ital
This
sect
ion
exam
ines
the
effe
cts o
f a g
ener
al re
plac
emen
t tax
on
the
inco
me
from
cap
ital
in a
ll do
mes
tic se
ctor
s. T
he g
ener
al ta
x ra
te is
cho
sen
so th
at it
will
fina
nce
the
sam
e re
al
gove
rnm
ent e
xpen
ditu
res o
n co
nsum
er g
oods
as t
he c
orpo
rate
tax
it re
plac
es.18
A c
ompa
rison
bet
wee
n th
ose
taxe
s pro
vide
s a w
ay to
isol
ate
the
effe
cts t
hat t
he c
orpo
rate
inco
me
tax
has o
n th
e do
mes
tic a
nd in
tern
atio
nal a
lloca
tions
of c
apita
l. I
n a
clos
ed e
cono
my,
the
corp
orat
e in
com
e ta
x af
fect
s eff
icie
ncy
and
inci
denc
e on
ly th
roug
h its
eff
ects
on
the
allo
catio
n of
inpu
ts b
etw
een
the
corp
orat
e an
d no
ncor
pora
te se
ctor
s. In
an
open
eco
nom
y, th
e
dom
estic
cor
pora
te in
com
e ta
x af
fect
s eff
icie
ncy
and
inci
denc
e th
roug
h its
eff
ect o
n th
e
allo
catio
n of
cap
ital b
oth
betw
een
the
dom
estic
cor
pora
te a
nd n
onco
rpor
ate
sect
ors a
nd b
etw
een
the
dom
estic
and
fore
ign
econ
omie
s. In
con
trast
, the
gen
eral
tax
affe
cts o
nly
the
inte
rnat
iona
l
allo
catio
n of
cap
ital.
Thu
s, a
com
paris
on b
etw
een
the
effe
cts o
f the
cor
pora
te ta
x an
d th
e ge
nera
l
tax
prov
ides
a w
ay to
sepa
rate
the
effe
cts t
he c
orpo
rate
tax
has b
ecau
se it
is im
pose
d on
ly o
n
Page 112
19 T
he g
ener
al ta
x al
so re
pres
ents
a c
orpo
rate
inte
grat
ion
polic
y th
at im
pose
s a si
ngle
tax
rate
on
the
inco
me
from
all
dom
estic
cap
ital i
nves
tmen
t reg
ardl
ess o
f the
sect
or in
whi
ch th
at c
apita
l is i
nves
ted.
20
Equ
atio
n (1
4) is
der
ived
und
er th
e as
sum
ptio
n th
at th
e do
mes
tic a
nd fo
reig
n ag
greg
ate
parti
al in
put s
ubst
itutio
nel
astic
ities
equ
al e
ach
othe
r. F
or th
e ge
nera
l tax
, the
agg
rega
te c
hang
es in
cap
ital a
re g
iven
by
mod
ified
ver
sion
s of
(3),
whe
re (3
b) is
igno
red
and
the
aggr
egat
e do
mes
tic c
apita
l sto
ck a
nd c
hang
e in
the
dom
estic
cos
t of c
apita
l und
erth
e ge
nera
l tax
are
subs
titut
ed in
to (3
a).
Equa
tion
(14)
is d
eriv
ed b
y al
so n
otin
g th
at a
ggre
gate
cou
ntry
labo
rsu
pplie
s do
not c
hang
e an
d th
at th
e w
orld
cap
ital s
uppl
y is
fixe
d.
-19-
som
e do
mes
tic se
ctor
s fro
m th
e ef
fect
s it h
as b
ecau
se it
is n
ot im
pose
d on
the
use
of c
apita
l
abro
ad.19 U
nder
the
gene
ral t
ax, t
he d
omes
tic w
age
rate
falls
by
less
than
it d
oes u
nder
the
corp
orat
e in
com
e ta
x be
caus
e th
e re
quire
d re
plac
emen
t val
ue o
f the
gen
eral
tax
rate
, c
an b
eg,
low
er th
an th
e co
rres
pond
ing
corp
orat
e ta
x ra
te; t
he g
ener
al ta
x is
impo
sed
on a
bro
ader
bas
e. A
s
unde
r the
cor
pora
te in
com
e ta
x, th
e w
age
rate
is d
eter
min
ed in
sect
or o
ne: T
he d
omes
tic w
age
rate
is d
eter
min
ed in
the
sam
e w
ay a
s in
Equa
tion
(2a)
, but
the
perc
enta
ge c
hang
e in
the
sect
or
one
cost
of c
apita
l und
er th
e co
rpor
ate
tax
is re
plac
ed b
y its
per
cent
age
chan
ge u
nder
the
gene
ral
tax,
.
()
rr
gg
g1
The
perc
enta
ge c
hang
e in
the
equi
libriu
m (t
ax-e
xclu
sive
) ret
urn
to c
apita
l, w
hich
is n
ow
the
cost
of c
apita
l onl
y to
fore
ign
prod
ucer
s, is
giv
en b
y:20
(14)
rK
KK
gg
d
dg
Equa
tion
(14)
is si
mila
r to
(4),
but t
he c
orpo
rate
tax
rate
is re
plac
ed b
y th
e ge
nera
l tax
rate
, and
the
term
for t
he n
onco
rpor
ate
capi
tal s
tock
doe
s not
ent
er th
e eq
uatio
n be
caus
e al
l
dom
estic
sect
ors a
re su
bjec
t to
the
gene
ral t
ax.
Whe
n th
e ge
nera
l tax
rate
is e
xtre
mel
y sm
all,
the
seco
nd te
rm in
the
deno
min
ator
of (
14) d
isap
pear
s so
that
wor
ldw
ide
capi
tal i
ncom
e is
redu
ced
exac
tly b
y an
am
ount
equ
al to
the
reve
nue
colle
cted
by
the
tax.
As i
n B
radf
ord
(197
8), c
apita
l
-20-
owne
rs w
orld
wid
e be
ar e
xact
ly 1
00 p
erce
nt o
f a v
ery
smal
l tax
on
the
inco
me
from
cap
ital u
sed
by d
omes
tic p
rodu
cers
. H
owev
er, a
s sho
wn
in th
e nu
mer
ical
app
licat
ion
belo
w, t
he w
orld
wid
e
burd
en is
not
div
ided
exa
ctly
in p
ropo
rtion
to th
e do
mes
tic a
nd fo
reig
n ow
ners
hip
shar
es o
f
wor
ld c
apita
l, be
caus
e th
e ta
x ca
n ha
ve d
iffer
ent e
ffec
ts o
n th
e pr
ices
of d
omes
tic a
nd fo
reig
n
cons
umer
goo
ds, a
nd c
apita
l ow
ners
mus
t con
sum
e w
here
they
live
.
The
effe
ct th
at th
e ge
nera
l tax
on
capi
tal i
ncom
e at
sour
ce h
as o
n ou
tput
pric
es fo
llow
s
the
sam
e ec
onom
ic re
ason
ing
as th
e an
alys
is o
f the
cor
pora
te in
com
e ta
x, e
xcep
t tha
t the
pric
e
equa
tions
incl
ude
the
perc
enta
ge c
hang
e in
the
tax-
incl
usiv
e co
st o
f cap
ital f
or a
ll do
mes
tic
sect
ors r
athe
r tha
n ju
st in
the
corp
orat
e se
ctor
s.
The
real
val
ue o
f tax
reve
nue
unde
r the
gen
eral
tax
is g
iven
by
(15)
Rr
KP
gg
ggd
Kgd
[(
)(
)]/
()
11
1
whe
re, a
nd
is th
e in
itial
dom
estic
cap
ital s
tock
,[
()
]K
wr
rgd
dg
gg
1K
expr
esse
d as
a sh
are
of th
e va
lue
of o
utpu
t. T
he ta
x ra
te fo
r the
gen
eral
tax
is c
hose
n to
equ
ate
real
reve
nues
and
, thu
s, th
e lu
mp-
sum
redi
strib
utio
ns u
nder
the
gene
ral t
ax a
nd th
e co
rpor
ate
tax.
VI.
Pers
onal
Tax
es o
n D
omes
tic R
esid
ents
Pers
onal
taxe
s on
dom
estic
resi
dent
s als
o pr
ovid
e us
eful
pol
icy
alte
rnat
ives
aga
inst
whi
ch
to e
valu
ate
the
inte
rnat
iona
l eff
ects
of t
he c
orpo
rate
inco
me
tax
and
gene
ral t
ax.
Such
per
sona
l
taxe
s are
non
dist
ortio
nary
und
er th
e as
sum
ptio
ns o
f the
mod
el u
sed
in th
is st
udy,
bec
ause
the
pers
onal
supp
lies o
f lab
or a
nd c
apita
l are
fixe
d an
d do
mes
tic re
side
nts c
anno
t mov
e ab
road
to
esca
pe ta
xatio
n. A
s a re
sult,
a p
erso
nal t
ax o
n la
bor i
ncom
e is
bor
ne e
ntire
ly b
y la
bor;
a pe
rson
al
Page 113
21 T
he a
ppen
dix
com
pare
s the
resu
lts u
nder
alte
rnat
ive
shar
e as
sum
ptio
ns c
onsi
sten
t with
Har
berg
er (1
995)
.22
Tha
t val
ue is
bas
ed o
n es
timat
es in
Ham
erm
esh
and
Gra
nt (1
979)
. Th
e re
sults
of t
he a
pplic
atio
n in
the
curr
ent
stud
y ar
e no
t ver
y se
nsiti
ve to
a c
hang
e in
that
val
ue to
1.0
.
-21-
tax
on th
e w
orld
wid
e in
com
e of
the
dom
estic
ow
ners
of c
apita
l is b
orne
ent
irely
by
thos
e ow
ners
;
and
a un
iform
tax
on th
e pe
rson
al in
com
e or
con
sum
ptio
n of
dom
estic
resi
dent
s is b
orne
by
thos
e
resi
dent
s in
prop
ortio
n to
thei
r ini
tial s
hare
s of d
omes
tic p
erso
nal i
ncom
e.
VII
.A
Num
eric
al A
pplic
atio
n
The
mod
el c
an b
e ap
plie
d ba
sed
on v
ery
few
ass
umpt
ions
abo
ut th
e ec
onom
y. S
hare
assu
mpt
ions
(Tab
le 1
) app
ly fo
r the
Uni
ted
Stat
es a
nd a
re ta
ken
from
Gra
velle
and
Sm
ette
rs
(200
6).21
The
cap
ital i
nten
sitie
s of s
ecto
rs o
ne a
nd tw
o ar
e in
itial
ly e
quat
ed fo
r sim
plic
ity.
Whe
n
thos
e ca
pita
l int
ensi
ties a
re e
qual
, the
inci
denc
e re
sults
are
the
sam
e as
if th
e fir
st tw
o se
ctor
s are
com
bine
d in
to o
ne se
ctor
for w
hich
the
fore
ign
and
dom
estic
out
puts
are
per
fect
subs
titut
es.
In
othe
r wor
ds, t
he fa
ct th
at se
ctor
two
prod
uces
fore
ign
and
dom
estic
out
puts
that
are
not
per
fect
subs
titut
es d
oes n
ot a
ffec
t the
inci
denc
e re
sults
whe
n th
e fir
st tw
o se
ctor
s hav
e th
e sa
me
capi
tal
inte
nsiti
es.
A la
ter p
art o
f the
app
licat
ion
exam
ines
how
inci
denc
e ch
ange
s whe
n th
ose
capi
tal
inte
nsiti
es a
re d
iffer
ent.
The
dom
estic
eco
nom
y ac
coun
ts fo
r 30
perc
ent o
f wor
ld o
utpu
t. In
addi
tion,
dom
estic
resi
dent
s are
ass
umed
to o
wn
30 p
erce
nt o
f wor
ld o
utpu
t, so
the
coun
try is
neith
er a
net
inte
rnat
iona
l len
der n
or a
net
inte
rnat
iona
l bor
row
er.
That
ass
umpt
ion
is a
lso
rela
xed
late
r in
this
stud
y. C
onsi
sten
t with
Mut
ti an
d G
rube
rt (1
985)
, the
par
tial e
last
icity
of
inpu
t dem
and
subs
titut
ion
betw
een
capi
tal a
nd la
bor i
s ini
tially
set e
qual
to 0
.6.22
It is
not
obv
ious
how
to c
hoos
e th
e rig
ht v
alue
for t
he (t
ax-e
xclu
sive
) cor
pora
te ta
x ra
te
beca
use
the
actu
al U
.S. i
ncom
e ta
x sy
stem
is c
onsi
dera
bly
mor
e co
mpl
ex th
an in
the
mod
el.
Afte
r acc
ount
ing
for p
erso
nal a
nd b
usin
ess i
ncom
e ta
xes,
depr
ecia
tion
rule
s, bu
sine
ss fi
nanc
e,
23 E
ven
thou
gh c
apita
l is p
erfe
ctly
mob
ile, o
nly
a fin
ite p
erce
ntag
e of
the
dom
estic
cap
ital s
tock
is re
allo
cate
dab
road
in re
spon
se to
the
tax,
bec
ause
a re
duct
ion
in th
e ca
pita
l sto
ck in
crea
ses t
he m
argi
nal p
rodu
ct o
f cap
ital i
n th
edo
mes
tic c
orpo
rate
sect
ors.
-22-
and
othe
r fac
tors
, the
Con
gres
sion
al B
udge
t Off
ice
(200
5b) f
inds
that
the
U.S
. cor
pora
te ta
x
caus
es th
e co
st o
f cap
ital i
n th
e U
.S. c
orpo
rate
sect
ors t
o be
6.2
5 pe
rcen
t hig
her t
han
the
cost
of
capi
tal i
n th
e no
ncor
pora
te se
ctor
s. T
hat i
s the
tax
rate
use
d in
this
app
licat
ion.
Alte
rnat
ivel
y, a
s
a be
nchm
ark,
the
mod
el’s
pre
dict
ions
are
cal
cula
ted
whe
n th
e ta
x ra
te is
infin
itesi
mal
ly sm
all,
whi
ch h
as th
e ad
vant
age
that
thos
e pr
edic
tions
dep
end
on n
eith
er th
e ac
tual
U.S
. tax
rate
nor
the
inpu
t sub
stitu
tion
elas
ticity
, but
can
still
be
used
to c
hara
cter
ize
the
inci
denc
e ef
fect
s of a
smal
l
chan
ge in
the
corp
orat
e in
com
e ta
x.
Econ
omic
Res
pons
es to
the
Cor
pora
te In
com
e Ta
x
The
mod
el p
redi
cts a
var
iety
of e
cono
mic
resp
onse
s to
the
intro
duct
ion
of th
e co
rpor
ate
tax
in a
new
long
-run
equ
ilibr
ium
(Tab
le 2
). In
resp
onse
to a
n in
crea
se in
the
dom
estic
cor
pora
te
cost
of c
apita
l, th
e ca
pita
l sto
cks f
all i
n th
e do
mes
tic c
orpo
rate
sect
ors a
nd ri
se in
the
dom
estic
nonc
orpo
rate
sect
ors a
nd in
the
fore
ign
coun
try.
The
dom
estic
cor
pora
te c
apita
l sto
ck fa
lls b
y
alm
ost 4
per
cent
. Th
e ag
greg
ate
dom
estic
cap
ital s
tock
falls
by
2 pe
rcen
t, w
hich
impl
ies t
hat t
he
arc
elas
ticity
of t
he d
omes
tic c
apita
l sto
ck w
ith re
spec
t to
the
6.25
per
cent
cor
pora
te ta
x is
0.3
2.
For e
ach
one
perc
ent b
y w
hich
the
tax
initi
ally
incr
ease
s the
cor
pora
te c
ost o
f cap
ital,
the
dom
estic
cap
ital s
tock
falls
by
0.32
per
cent
.23
Thos
e in
vest
men
t res
pons
es d
rive
dow
n th
e co
st o
f cap
ital b
y 1.
2 pe
rcen
t for
the
unta
xed
prod
ucer
s in
the
dom
estic
non
corp
orat
e se
ctor
s and
the
fore
ign
sect
ors.
As a
resu
lt, th
e co
st o
f
capi
tal f
or d
omes
tic c
orpo
rate
pro
duce
rs in
crea
ses b
y on
ly 5
.0 p
erce
nt in
resp
onse
to th
e 6.
25
perc
ent c
orpo
rate
tax.
Page 114
-23-
The
real
loca
tion
of c
apita
l als
o af
fect
s wag
es.
Bec
ause
ther
e is
less
dom
estic
cap
ital,
and
labo
r can
not e
mig
rate
, the
dom
estic
wag
e ra
te fa
lls b
y 1.
1 pe
rcen
t, dr
iven
by
com
petit
ion
in
sect
or o
ne (E
quat
ions
1 a
nd 2
). T
he d
omes
tic w
age
rate
has
to fa
ll by
that
am
ount
in o
rder
to
offs
et th
e in
crea
sed
corp
orat
e co
st o
f cap
ital.
Sim
ilarly
, the
fore
ign
wag
e in
crea
ses b
y 0.
25
perc
ent b
ecau
se th
e la
rger
fore
ign
capi
tal s
tock
impr
oves
the
prod
uctiv
ity o
f for
eign
labo
r. T
he
fore
ign
wag
e ra
te in
crea
ses b
y ju
st e
noug
h fo
r the
resu
lting
incr
ease
in la
bor c
osts
to fu
lly o
ffse
t
the
decr
ease
in c
apita
l cos
ts fo
r sec
tor o
ne o
f the
fore
ign
econ
omy.
Bot
h do
mes
tic a
nd fo
reig
n la
nd re
nts i
ncre
ase.
The
dom
estic
land
rent
rise
s bec
ause
the
cost
s of l
abor
and
cap
ital b
oth
decl
ine
for s
ecto
r fou
r (ag
ricul
ture
), so
that
land
bec
omes
mor
e
prod
uctiv
e. F
orei
gn la
nd re
nt ri
ses b
ecau
se se
ctor
four
is m
ore
capi
tal-i
nten
sive
than
sect
or o
ne,
so th
e de
clin
e of
the
fore
ign
cost
of c
apita
l mor
e th
an fu
lly o
ffse
ts th
e in
crea
sed
cost
of l
abor
to
sect
or fo
ur o
f the
fore
ign
econ
omy.
Ove
rall,
con
sum
er p
rices
fall
slig
htly
in b
oth
coun
tries
. O
utpu
t pric
es d
o no
t cha
nge
in
the
first
two
sect
ors (
mos
tly m
anuf
actu
ring)
, be
caus
e se
ctor
one
pro
duce
s the
num
erai
re a
nd
sect
or tw
o ha
s the
sam
e ca
pita
l int
ensi
ty a
s sec
tor o
ne.
Thus
, any
wag
e ch
ange
that
exa
ctly
offs
ets t
he in
crea
sed
cost
of c
apita
l in
sect
or o
ne w
ill a
lso
exac
tly o
ffse
t the
incr
ease
d co
st o
f
capi
tal i
n se
ctor
two.
Sec
tor t
hree
, the
oth
er c
orpo
rate
sect
or (u
tiliti
es a
nd tr
ansp
orta
tion)
, is
mor
e ca
pita
l-int
ensi
ve th
an se
ctor
one
. A
s a re
sult,
the
pric
e of
the
dom
estic
sect
or th
ree
outp
ut
incr
ease
s bec
ause
the
rise
in th
e co
rpor
ate
cost
of c
apita
l mor
e th
an fu
lly o
ffse
ts th
e de
crea
se in
labo
r cos
ts.
Sim
ilarly
, the
pric
e of
sect
or th
ree
outp
ut in
the
fore
ign
econ
omy
falls
slig
htly
beca
use
the
decr
ease
d fo
reig
n co
st o
f cap
ital o
ver-
com
pens
ates
for t
he in
crea
sed
fore
ign
labo
r
cost
. Th
e pr
ice
of o
utpu
t in
sect
or fo
ur (a
gric
ultu
re) d
oes n
ot c
hang
e, b
y as
sum
ptio
n. F
or
24 T
hat i
s the
wor
ldw
ide
dead
wei
ght l
oss,
or e
xces
s bur
den
from
the
tax.
The
dea
dwei
ght l
oss i
s rel
ativ
ely
smal
lbe
caus
e th
e ta
x is
smal
l and
ther
e ar
e no
oth
er p
re-e
xist
ing
dist
ortio
ns.
Bec
ause
this
stud
y is
abo
ut th
e di
strib
utio
nof
the
burd
en, i
t wou
ld b
e su
ffic
ient
to a
ssum
e th
at th
e ta
x ra
te is
infin
itesi
mal
, as i
s don
e in
a la
ter s
ectio
n, b
elow
. H
owev
er, u
sing
a sm
all f
inite
tax
rate
allo
ws t
he n
umer
ical
app
licat
ion
to il
lust
rate
the
pote
ntia
l siz
e an
d na
ture
of
som
e of
the
impo
rtant
eco
nom
ic e
ffec
ts o
f the
tax.
The
val
ue o
btai
ned
for e
xces
s bur
den
in th
e ex
ampl
e sh
ould
ther
efor
e no
t be
take
n se
rious
ly a
s an
estim
ate
of th
e ov
eral
l exc
ess b
urde
n of
the
corp
orat
e in
com
e ta
x.
-24-
dom
estic
out
put o
f sec
tor f
ive
(hou
sing
and
reta
il se
rvic
es),
the
dom
estic
pric
e de
clin
es b
ecau
se
both
cap
ital a
nd la
bor b
ecom
e ch
eape
r for
that
sect
or.
The
fore
ign
pric
e of
sect
or fi
ve o
utpu
t
also
dec
lines
bec
ause
sect
or fi
ve is
mor
e ca
pita
l-int
ensi
ve th
an se
ctor
one
, so
the
effe
ct o
f a
decr
ease
in th
e fo
reig
n co
st o
f cap
ital d
omin
ates
the
incr
ease
in th
e fo
reig
n w
age
rate
.
Rea
l priv
ate
inco
mes
, bef
ore
gove
rnm
ent t
rans
fers
, cha
nge
for b
oth
dom
estic
and
fore
ign
resi
dent
s. T
hose
cha
nges
are
the
tax
burd
ens.
For
dom
estic
resi
dent
s, la
bor a
nd c
apita
l inc
omes
each
fall
by a
bout
1 p
erce
nt.
A sm
all o
vera
ll de
crea
se in
the
dom
estic
pric
es o
f con
sum
er g
oods
only
slig
htly
off
sets
the
fall
in d
omes
tic w
ages
and
the
decr
ease
in th
e do
mes
tic c
apita
l ow
ners
’
retu
rn to
thei
r sha
re o
f the
wor
ld c
apita
l sto
ck.
In c
ontra
st, r
eal i
ncom
e pa
id to
dom
estic
land
owne
rs in
crea
ses b
ecau
se la
nd re
nts i
ncre
ase
and
cons
umer
pric
es fa
ll. W
hen
com
bine
d, th
e
aggr
egat
e re
al d
omes
tic p
rivat
e in
com
e fa
lls b
y 0.
978
perc
ent b
efor
e go
vern
men
t tra
nsfe
rs.
Bec
ause
the
real
val
ue o
f rev
enue
from
the
tax
(the
real
val
ue o
f gov
ernm
ent p
urch
ases
of
cons
umer
goo
ds fi
nanc
ed b
y th
e ta
x) e
qual
s onl
y 0.
944
perc
ent o
f the
initi
al d
omes
tic in
com
e,
the
dom
estic
real
nat
iona
l inc
ome
is re
duce
d by
abo
ut .0
35 p
erce
nt (n
ot sh
own
in T
able
2).
Tha
t
natio
nal l
oss e
qual
s abo
ut 3
.7 p
erce
nt o
f the
reve
nue
from
the
tax
(100
*0.0
35/0
.944
).24
Fore
ign
labo
r ben
efits
from
bot
h an
incr
ease
in th
e fo
reig
n w
age
rate
and
an
over
all
decr
ease
in fo
reig
n co
nsum
er p
rices
. Fo
reig
n ca
pita
l ow
ners
lose
from
a re
duce
d re
turn
to th
eir
capi
tal.
Tha
t los
s is o
ffse
t som
ewha
t by
a re
duce
d fo
reig
n co
st o
f con
sum
er g
oods
. Fo
reig
n la
nd
Page 115
-25-
owne
rs b
enef
it sl
ight
ly fr
om a
n in
crea
se in
fore
ign
land
rent
s and
a d
ecre
ase
in th
e co
st o
f
fore
ign
cons
umer
goo
ds.
Ove
rall,
the
gain
s of f
orei
gn w
orke
rs a
nd la
ndow
ners
are
exa
ctly
off
set b
y th
e lo
sses
of
fore
ign
capi
tal o
wne
rs so
that
non
e of
the
net b
urde
n of
the
tax
is e
xpor
ted
unde
r the
bas
ic
assu
mpt
ions
. In
eff
ect,
the
dom
estic
cor
pora
te ta
x sh
ifts t
he fo
reig
n di
strib
utio
n of
inco
me
tow
ard
labo
r and
land
owne
rs a
nd a
way
from
fore
ign
capi
tal o
wne
rs.
Und
er a
ltern
ativ
e
assu
mpt
ions
, as e
xam
ined
late
r in
this
app
licat
ion,
the
tax
can
also
shift
eith
er a
net
bur
den
or a
net b
enef
it to
fore
ign
resi
dent
s.
Burd
ens o
f the
Cor
pora
te In
com
e Ta
x
Und
er th
e ba
sic
assu
mpt
ions
, dom
estic
labo
r and
cap
ital o
wne
rs b
ear t
he c
orpo
rate
tax
roug
hly
in p
ropo
rtion
to th
eir i
nitia
l sha
res o
f inc
ome.
Exp
ress
ed a
s sha
res o
f rea
l tax
reve
nue
(Tab
le 3
), th
e bu
rden
s im
pose
d on
dom
estic
wor
kers
and
cap
ital o
wne
rs a
re ju
st a
bove
thei
r
initi
al sh
ares
of d
omes
tic in
com
e. D
omes
tic la
bor
bear
s 73.
7 pe
rcen
t of t
he c
orpo
rate
tax
burd
en
and
rece
ives
abo
ut 7
0 pe
rcen
t of i
ncom
e in
the
no-ta
x eq
uilib
rium
. D
omes
tic c
apita
l ow
ners
bea
r
32.5
per
cent
of t
he c
orpo
rate
tax
burd
en a
nd re
ceiv
e ab
out 2
9 pe
rcen
t of i
ncom
e in
the
no-ta
x
equi
libriu
m.
Dom
estic
land
owne
rs b
enef
it by
2.5
per
cent
of t
he re
venu
e.
The
dom
estic
cor
pora
te in
com
e ta
x sh
ifts t
he fo
reig
n di
strib
utio
n of
inco
me
away
from
capi
tal o
wne
rs to
war
d la
bor a
nd, s
light
ly, t
owar
d la
ndow
ners
. Fo
reig
n la
bor’
s ben
efit
is a
bout
equa
l to
dom
estic
labo
r’s l
oss,
but t
hat b
enef
it to
fore
ign
labo
r is a
lmos
t exa
ctly
off
set b
y th
e lo
ss
to fo
reig
n ca
pita
l ow
ners
.
25 N
ot sh
own
in T
able
3, w
orld
wid
e ca
pita
l inc
ome
is re
duce
d by
119
.3 p
erce
nt o
f the
tax
reve
nue.
How
ever
, ade
clin
e in
dom
estic
and
fore
ign
cons
umer
pric
es o
ffse
ts p
art o
f tha
t cap
ital i
ncom
e re
duct
ion
so th
at th
e bu
rden
for
capi
tal o
wne
rs w
orld
wid
e eq
uals
104
.7 p
erce
nt o
f the
tax
reve
nue.
-26-
Whe
n m
easu
red
on a
n ag
greg
ate
wor
ldw
ide
basi
s, la
bor b
ears
ver
y lit
tle (2
.4 p
erce
nt o
f
the
reve
nue)
of t
he b
urde
n fr
om th
e co
rpor
ate
inco
me
tax.
In
cont
rast
, cap
ital o
wne
rs w
orld
wid
e
bear
slig
htly
mor
e th
an 1
00 p
erce
nt o
f the
bur
den
(104
.7 p
erce
nt o
f the
reve
nue)
, alm
ost i
n
prop
ortio
n to
the
dom
estic
and
fore
ign
owne
rshi
p sh
ares
of c
apita
l.25
Thos
e w
orld
wid
e im
plic
atio
ns a
re si
mila
r to
the
cent
ral p
redi
ctio
ns o
f the
clo
sed-
econ
omy
anal
ysis
of H
arbe
rger
(196
2), i
n w
hich
all
capi
tal o
wne
rs b
ear t
he fu
ll bu
rden
of t
he
U.S
. cor
pora
te ta
x an
d la
bor e
scap
es th
e bu
rden
. Th
e es
sent
ial d
iffer
ence
from
the
clos
ed
econ
omy
is th
at b
oth
labo
r and
cap
ital c
an b
e re
allo
cate
d fr
eely
bet
wee
n se
ctor
s in
the
clos
ed
econ
omy,
but
onl
y ca
pita
l can
be
real
loca
ted
betw
een
coun
tries
in th
e op
en e
cono
my.
Wor
ldw
ide,
cap
ital o
wne
rs st
ill d
o no
t esc
ape
the
tax
in th
e op
en e
cono
my,
but
dom
estic
labo
r
bear
s a b
urde
n be
caus
e do
mes
tic w
orke
rs c
anno
t em
igra
te to
take
adv
anta
ge o
f an
incr
ease
d
fore
ign
wag
e ra
te.
Dom
estic
cap
ital o
wne
rs c
an e
scap
e pa
rt of
the
burd
en b
ecau
se, u
nlik
e
wor
kers
, the
y do
not
hav
e to
live
whe
re th
eir c
apita
l is u
sed.
If
labo
r cou
ld m
ove
free
ly
inte
rnat
iona
lly, t
he d
omes
tic a
nd fo
reig
n w
ages
wou
ld b
e eq
ual.
In th
at c
ase,
ana
lysi
s of t
he
open
-eco
nom
y in
cide
nce
wou
ld b
e ju
st li
ke a
naly
sis o
f the
clo
sed-
econ
omy
inci
denc
e. F
or su
ch
an o
pen
econ
omy,
all
fore
ign
sect
ors w
ould
sim
ply
be p
art o
f the
non
corp
orat
e se
ctor
s.
Oth
erw
ise,
the
clos
ed-e
cono
my
anal
ysis
cou
ld b
e ap
plie
d di
rect
ly.
Page 116
-27-
Econ
omic
Res
pons
es to
the
Gen
eral
Rep
lace
men
t Tax
The
econ
omic
cha
nges
und
er th
e ge
nera
l tax
are
diff
eren
t fro
m th
e ch
ange
s und
er th
e
corp
orat
e ta
x (T
able
2) b
ecau
se th
e ge
nera
l tax
rate
is lo
wer
than
the
corp
orat
e ta
x ra
te a
nd th
e
gene
ral t
ax is
impo
sed
on a
ll do
mes
tic se
ctor
s rat
her t
han
just
the
corp
orat
e se
ctor
s.
Com
pare
d to
the
corp
orat
e ta
x, th
e fo
reig
n co
st o
f cap
ital d
oes n
ot d
eclin
e by
as m
uch
unde
r the
gen
eral
tax
beca
use
less
of t
he w
orld
cap
ital s
tock
is re
allo
cate
d ab
road
in re
spon
se to
the
gene
ral t
ax.
The
dom
estic
cos
t of c
apita
l inc
reas
es in
all
sect
ors,
but b
y le
ss th
an h
alf a
s
muc
h as
in th
e do
mes
tic c
orpo
rate
sect
ors u
nder
the
corp
orat
e ta
x. A
s a re
sult,
the
dom
estic
wag
e ra
te d
oes n
ot h
ave
to d
ecre
ase
by a
s muc
h as
und
er th
e co
rpor
ate
inco
me
tax,
bec
ause
less
capi
tal h
as to
be
real
loca
ted
away
from
sect
or o
ne in
ord
er fo
r the
resu
lting
dec
reas
e in
labo
r
cost
s to
fully
off
set t
he in
crea
se in
cap
ital c
osts
. Th
e fo
reig
n w
age
rate
incr
ease
s by
slig
htly
less
than
it d
oes u
nder
the
corp
orat
e ta
x, a
lso
beca
use
less
cap
ital i
s rea
lloca
ted
abro
ad.
The
dom
estic
land
rent
dec
lines
und
er th
e ge
nera
l tax
bec
ause
the
pric
es o
f lab
or a
nd c
apita
l cha
nge
by th
e
sam
e am
ount
s in
ever
y do
mes
tic se
ctor
. Th
e do
mes
tic la
nd re
nt fa
lls b
ecau
se se
ctor
four
is m
ore
capi
tal-i
nten
sive
than
sect
or o
ne.
The
fore
ign
land
rent
incr
ease
s by
slig
htly
less
than
it d
oes
unde
r the
cor
pora
te ta
x.
Dom
estic
con
sum
er p
rices
act
ually
incr
ease
und
er th
e ge
nera
l tax
. Th
e pr
ice
of se
ctor
thre
e ou
tput
(util
ities
and
tran
spor
tatio
n) in
crea
ses b
y le
ss th
an it
doe
s und
er th
e co
rpor
ate
tax.
But
, in
cont
rast
to th
e co
rpor
ate
tax,
the
pric
e of
sect
or fi
ve o
utpu
t (ho
usin
g an
d re
tail
serv
ices
)
incr
ease
s bec
ause
that
sect
or’s
cos
t of c
apita
l inc
reas
es u
nder
the
gene
ral t
ax, a
nd se
ctor
five
prod
uctio
n is
mor
e ca
pita
l-int
ensi
ve th
an p
rodu
ctio
n in
sect
or o
ne.
In c
ontra
st, f
orei
gn c
onsu
mer
pric
es d
eclin
e by
slig
htly
less
ove
rall
than
und
er th
e co
rpor
ate
tax.
-28-
Thos
e ec
onom
ic d
iffer
ence
s fro
m th
e co
rpor
ate
tax
impl
y th
at, i
f the
gen
eral
tax
wer
e to
repl
ace
the
corp
orat
e ta
x, c
apita
l wou
ld b
e re
allo
cate
d to
the
dom
estic
cor
pora
te se
ctor
s and
away
from
the
fore
ign
coun
try a
nd th
e do
mes
tic n
onco
rpor
ate
sect
ors.
The
agg
rega
te d
omes
tic
capi
tal s
tock
wou
ld in
crea
se, c
ausi
ng d
omes
tic w
ages
to a
lso
incr
ease
. Th
e fo
reig
n ca
pita
l sto
ck
wou
ld d
ecre
ase,
cau
sing
the
fore
ign
wag
e ra
te to
fall
and
the
fore
ign
cost
of c
apita
l to
incr
ease
.
Dom
estic
and
fore
ign
land
rent
s wou
ld fa
ll, e
spec
ially
the
dom
estic
rent
s. D
omes
tic c
onsu
mer
pric
es w
ould
incr
ease
and
fore
ign
cons
umer
pric
es w
ould
incr
ease
ver
y sl
ight
ly.
Rep
lace
men
t of t
he c
orpo
rate
tax
by th
e ge
nera
l tax
wou
ld a
lso
caus
e re
al p
rivat
e
inco
mes
to c
hang
e. D
omes
tic la
bor w
ould
gai
n be
caus
e th
e do
mes
tic w
age
incr
ease
wou
ld b
e
mor
e th
an la
rge
enou
gh to
off
set t
he in
crea
se in
dom
estic
con
sum
er p
rices
. Fo
reig
n la
bor w
ould
lose
bec
ause
fore
ign
wag
es w
ould
fall
whi
le fo
reig
n co
nsum
er p
rices
wou
ld ri
se.
Bec
ause
dom
estic
con
sum
er p
rices
wou
ld in
crea
se, d
omes
tic c
apita
l ow
ners
wou
ld b
e w
orse
off
than
unde
r the
cor
pora
te ta
x, e
ven
thou
gh th
eir c
apita
l wou
ld b
e us
ed m
ore
effic
ient
ly w
orld
wid
e th
an
unde
r the
cor
pora
te ta
x. B
ut fo
reig
n ca
pita
l ow
ners
wou
ld b
e be
tter o
ff b
ecau
se th
e fo
reig
n
cons
umer
pric
es w
ould
not
incr
ease
by
enou
gh to
off
set t
heir
bene
fit fr
om th
e m
ore
effic
ient
use
of c
apita
l. L
ando
wne
rs, e
spec
ially
dom
estic
land
owne
rs,
wou
ld lo
se fr
om th
e re
plac
emen
t tax
.
As u
nder
the
corp
orat
e ta
x, a
ggre
gate
real
fore
ign
inco
me
wou
ld n
ot c
hang
e un
der t
he
repl
acem
ent t
ax.
Dom
estic
nat
iona
l inc
ome
wou
ld in
crea
se sl
ight
ly b
ecau
se th
e ge
nera
l tax
at
sour
ce w
ould
ach
ieve
a m
ore
effic
ient
dom
estic
allo
catio
n of
cap
ital t
han
the
corp
orat
e ta
x.
Page 117
-29-
Burd
ens o
f the
Gen
eral
Rep
lace
men
t Tax
If th
e co
rpor
ate
tax
wer
e re
plac
ed b
y th
e ge
nera
l tax
, the
exc
ess b
urde
n w
ould
be
redu
ced
(Tab
le 3
). U
nder
the
gene
ral t
ax, t
he e
xces
s bur
den
wou
ld d
eclin
e by
alm
ost h
alf f
rom
3.7
perc
ent t
o ju
st 2
.0 p
erce
nt o
f rev
enue
bec
ause
cap
ital w
ould
be
allo
cate
d m
ore
effic
ient
ly.
Dom
estic
cap
ital w
ould
then
pro
vide
the
sam
e m
argi
nal r
etur
n in
all
sect
ors.
Som
e ca
pita
l wou
ld
also
be
real
loca
ted
from
abr
oad,
so th
at th
e di
ffer
ence
bet
wee
n th
e do
mes
tic a
nd fo
reig
n pr
e-ta
x
retu
rns w
ould
be
smal
ler t
han
it is
und
er th
e co
rpor
ate
tax.
All
of th
e be
nefit
of t
hat i
ncre
ase
in
effic
ienc
y w
ould
go
to d
omes
tic re
side
nts,
as a
n in
crea
se in
real
dom
estic
nat
iona
l inc
ome
equa
l
to 1
.7 p
erce
nt o
f the
tax
reve
nue.
The
re w
ould
be
no c
hang
e in
the
real
fore
ign
natio
nal i
ncom
e.
Rep
lace
men
t by
the
gene
ral t
ax w
ould
als
o ch
ange
the
dist
ribut
ion
of ta
x bu
rden
s
(Tab
le 3
). It
wou
ld t
rans
fer r
ough
ly 1
3 pe
rcen
t of t
he b
urde
n aw
ay fr
om d
omes
tic la
bor a
nd
tow
ard
dom
estic
cap
ital o
wne
rs a
nd la
ndow
ners
. It
wou
ld a
lso
trans
fer a
bout
10
perc
ent o
f the
burd
en a
way
from
fore
ign
capi
tal o
wne
rs to
war
d fo
reig
n la
bor a
nd la
ndow
ners
.
Diff
eren
tial B
urde
ns o
f Oth
er T
axes
The
pers
onal
taxe
s als
o pr
ovid
e us
eful
com
paris
ons (
Tabl
e 3)
. U
nder
the
assu
mpt
ions
of
the
mod
el u
sed
in th
is st
udy,
non
e of
thos
e ta
xes d
isto
rt be
havi
or b
ecau
se e
ach
is im
pose
d on
dom
estic
resi
dent
s who
can
not
mov
e ab
road
to e
scap
e th
e ta
x, n
or c
an th
ey c
hang
e th
eir l
abor
supp
lies o
r sav
ings
beh
avio
r. R
epla
cem
ent o
f the
cor
pora
te in
com
e ta
x by
any
of t
hose
taxe
s
wou
ld th
eref
ore
elim
inat
e th
e ex
cess
bur
den
and
exac
tly re
vers
e th
e di
strib
utio
nal e
ffec
ts th
at th
e
corp
orat
e ta
x ha
s on
fore
ign
resi
dent
s. F
orei
gn la
bor a
nd la
ndow
ners
wou
ld b
e w
orse
off
by
an
amou
nt th
at is
tran
sfer
red,
exa
ctly
, to
fore
ign
capi
tal o
wne
rs.
26 T
hat i
s not
how
the
U.S
. cor
pora
te ta
x is
des
crib
ed le
gally
, but
how
it w
orks
in p
ract
ice
as a
resu
lt of
the
com
bine
d ef
fect
s of a
ll in
tern
atio
nal t
ax ru
les a
nd c
orpo
rate
beh
avio
r (se
e G
rube
rt, 2
004)
.
-30-
Dom
estic
labo
r wou
ld b
ear a
ll of
the
burd
en o
f the
wag
e ta
x, so
thei
r bur
den
wou
ld
incr
ease
by
abou
t 26
perc
ent o
f the
reve
nue
unde
r the
repl
acem
ent t
ax.
The
burd
en sh
ares
of
dom
estic
and
fore
ign
capi
tal o
wne
rs w
ould
dec
reas
e an
d th
e bu
rden
shar
es o
f for
eign
labo
r
wou
ld in
crea
se b
y am
ount
s equ
al to
thei
r bur
den
shar
es o
f the
cor
pora
te ta
x. O
n a
wor
ldw
ide
basi
s, a
dom
estic
wag
e re
plac
emen
t tax
wou
ld sh
ift ro
ughl
y th
e en
tire
burd
en fr
om c
apita
l
owne
rs to
dom
estic
labo
r.
Dom
estic
ow
ners
of c
apita
l wou
ld b
ear t
he fu
ll bu
rden
of a
dom
estic
tax
on th
eir
wor
ldw
ide
capi
tal i
ncom
e. I
f tha
t tax
was
use
d to
repl
ace
the
corp
orat
e ta
x, th
eir s
hare
of t
he ta
x
burd
en w
ould
incr
ease
by
67.5
per
cent
of t
he re
venu
e.
The
burd
en sh
ares
for d
omes
tic la
bor a
nd
land
ow
ners
wou
ld c
hang
e by
am
ount
s tha
t exa
ctly
off
set t
heir
shar
es o
f the
cor
pora
te in
com
e ta
x
burd
en. Th
at w
orld
wid
e ta
x on
dom
estic
cap
ital o
wne
rs a
chie
ves C
apita
l Exp
ort N
eutra
lity
(CEN
)
beca
use
it is
impo
sed
on th
e re
side
nts’
cap
ital i
ncom
e re
gard
less
of w
here
that
cap
ital i
s use
d in
prod
uctio
n. T
he U
.S. a
nd m
ost f
orei
gn c
orpo
rate
inco
me
taxe
s vio
late
CEN
bec
ause
they
are
effe
ctiv
ely
impo
sed
on th
e do
mes
tic u
se o
f cap
ital,
rega
rdle
ss o
f whe
re th
at c
apita
l is o
wne
d.26
Alth
ough
repl
acem
ent b
y th
e ta
x on
wor
ldw
ide
capi
tal i
ncom
e of
dom
estic
resi
dent
s wou
ld
impr
ove
wor
ldw
ide
effic
ienc
y in
the
allo
catio
n of
cap
ital,
the
wor
ldw
ide
effic
ienc
y ga
in e
qual
to
3.7
perc
ent o
f the
reve
nue
wou
ld b
e re
aliz
ed fu
lly a
s an
incr
ease
in th
e ag
greg
ate
dom
estic
natio
nal w
elfa
re.
Com
pare
d to
that
smal
l eff
icie
ncy
gain
, the
dom
estic
and
fore
ign
inco
me
redi
strib
utio
n ef
fect
s of s
witc
hing
to th
e ta
x th
at a
chie
ves C
EN w
ould
be
very
larg
e. O
n a
Page 118
27 T
he d
iffer
entia
l inc
iden
ce o
f tha
t rep
lace
men
t tax
als
o m
easu
res t
he b
alan
ced-
budg
et in
cide
nce
of e
limin
atin
g th
eco
rpor
ate
tax
if th
e go
vern
men
t wer
e to
off
set t
he lo
ss o
f cor
pora
te ta
x re
venu
e by
redu
cing
its s
pend
ing
– its
dist
ribut
iona
lly n
eutra
l lum
p-su
m tr
ansf
ers.
-31-
wor
ldw
ide
basi
s, ho
wev
er, b
oth
labo
r and
cap
ital o
wne
rs w
ould
be
only
slig
htly
bet
ter o
ff.
Land
owne
rs w
ould
be
slig
htly
wor
se o
ff.
If th
e co
rpor
ate
tax
wer
e re
plac
ed b
y a
unifo
rm ta
x on
the
inco
me
or c
onsu
mpt
ion
of
dom
estic
resi
dent
s, do
mes
tic la
bor a
nd c
apita
l ow
ners
wou
ld b
oth
gain
slig
htly
and
land
owne
rs
wou
ld lo
se.27
Tho
se c
hang
es w
ould
be
smal
l bec
ause
the
dom
estic
bur
den
shar
es o
f the
corp
orat
e in
com
e ta
x ar
e ap
prox
imat
ely
equa
l to
the
dom
estic
resi
dent
s’ sh
ares
of i
ncom
e or
cons
umpt
ion,
and
hen
ce to
the
shar
es o
f bur
den
unde
r a p
erso
nal i
ncom
e or
con
sum
ptio
n ta
x. O
n
a w
orld
wid
e ba
sis,
such
a re
plac
emen
t tax
wou
ld c
ause
a su
bsta
ntia
l tra
nsfe
r of i
ncom
e fr
om
labo
r to
capi
tal o
wne
rs, a
lmos
t ent
irely
due
to it
s eff
ects
on
fore
ign
resi
dent
s.
Infin
itesi
mal
Cor
pora
te T
ax R
ate
The
tax
inci
denc
e is
not
aff
ecte
d m
uch
by a
ssum
ptio
ns a
bout
the
leve
l of t
he c
orpo
rate
tax
rate
and
the
size
of t
he in
put s
ubst
itutio
n el
astic
ity.
That
lack
of s
ensi
tivity
can
be
seen
by
anal
yzin
g th
e ef
fect
s of a
n in
finite
sim
al ta
x ra
te (T
able
4),
whi
ch w
ould
app
roxi
mat
e th
e ef
fect
s
of a
ver
y sm
all i
ncre
ase
in th
e co
rpor
ate
tax
rate
. T
he b
urde
n sh
ares
show
n in
Tab
le 4
are
alm
ost t
he sa
me
as th
e bu
rden
shar
es sh
own
in T
able
3.
The
mai
n di
ffer
ence
is th
at th
e ex
cess
burd
en d
isap
pear
s whe
n th
e ta
x ra
te is
ver
y sm
all.
In th
at se
nse,
Tab
le 4
show
s the
pur
e
inci
denc
e ef
fect
s of t
he c
orpo
rate
inco
me
tax.
-32-
Aggr
egat
e In
tern
atio
nal S
pillo
ver E
ffect
s
Und
er th
e as
sum
ptio
ns u
sed
so fa
r, th
e do
mes
tic c
orpo
rate
inco
me
tax
dist
orts
the
allo
catio
n of
cap
ital a
nd c
hang
es th
e do
mes
tic a
nd fo
reig
n in
trana
tiona
l dis
tribu
tions
of i
ncom
e.
But
the
tax
does
not
aff
ect t
he a
ggre
gate
inte
rnat
iona
l dis
tribu
tion
of in
com
es.
Not
eve
n th
e
exce
ss b
urde
n is
exp
orte
d in
the
aggr
egat
e, e
ven
thou
gh th
e ta
x ca
uses
cap
ital t
o be
allo
cate
d
inef
ficie
ntly
on
a w
orld
wid
e ba
sis.
The
tax
burd
en is
not
exp
orte
d or
impo
rted
in th
e ag
greg
ate
beca
use
the
initi
al d
omes
tic a
nd fo
reig
n pe
r cap
ita w
ealth
end
owm
ents
are
ass
umed
to b
e eq
ual,
and
beca
use
the
corp
orat
e ta
x ha
s no
tarif
f-lik
e ef
fect
s whe
n th
e fir
st tw
o se
ctor
s hav
e th
e sa
me
capi
tal i
nten
sitie
s.
The
corp
orat
e in
com
e ta
x ca
n, h
owev
er, a
ffec
t the
agg
rega
te in
tern
atio
nal d
istri
butio
n of
inco
me
unde
r alte
rnat
ive
assu
mpt
ions
, but
the
inte
rnat
iona
l tra
nsfe
r can
go
in e
ither
dire
ctio
n.
The
aggr
egat
e ta
x bu
rden
can
be
expo
rted
or im
porte
d, a
nd th
e ef
fect
on
the
fore
ign
dist
ribut
ion
of in
com
e ca
n be
mor
e or
less
inte
nsifi
ed.
The
sim
ples
t int
erna
tiona
l tra
nsfe
r can
aris
e w
hen
the
dom
estic
cou
ntry
is a
net
inte
rnat
iona
l len
der o
r net
inte
rnat
iona
l bor
row
er.
One
of t
hose
situ
atio
ns w
ould
aris
e w
hen
the
two
coun
tries
had
diff
eren
t ini
tial p
er c
apita
wea
lth e
ndow
men
ts.
Firs
t, su
ppos
e th
at th
e
dom
estic
cou
ntry
is a
net
inte
rnat
iona
l len
der.
Whi
le th
e do
mes
tic c
apita
l sto
ck e
qual
s 30
perc
ent o
f the
wor
ld c
apita
l sto
ck (t
he b
ase
case
), su
ppos
e th
at d
omes
tic re
side
nts o
wn
35 p
erce
nt
of w
orld
cap
ital.
Now
, the
cor
pora
te ta
x ha
s the
sam
e ef
fect
s on
prod
uctio
n an
d pr
ices
as i
n th
e
base
cas
e, b
ut d
omes
tic c
apita
l ow
ners
bea
r a la
rger
shar
e of
the
burd
en (T
able
5).
Com
pare
d to
the
base
cas
e, th
e do
mes
tic c
apita
l ow
ners
’ sha
re o
f the
bur
den
incr
ease
s and
the
fore
ign
capi
tal
owne
rs’ s
hare
falls
, eac
h by
slig
htly
mor
e th
an 5
per
cent
. Th
ose
chan
ges a
re sl
ight
ly g
reat
er th
an
Page 119
-33-
5 pe
rcen
t bec
ause
, alth
ough
con
sum
er p
rices
fall
in e
ach
coun
try, d
omes
tic c
onsu
mer
pric
es fa
ll
by le
ss th
an fo
reig
n co
nsum
er p
rices
(Tab
le 2
). T
hat d
iffer
ence
bet
wee
n do
mes
tic a
nd fo
reig
n
cons
umer
pric
e ch
ange
s, co
mpa
red
to th
e ba
se c
ase,
als
o ca
uses
the
exce
ss b
urde
n of
the
tax
to
incr
ease
slig
htly
from
3.7
per
cent
to 4
.0 p
erce
nt o
f tax
reve
nue.
The
agg
rega
te d
omes
tic re
al
natio
nal i
ncom
e fa
lls b
y an
am
ount
equ
al to
9.1
per
cent
of t
he ta
x re
venu
e. C
ompa
red
to th
e
base
cas
e, th
e ag
greg
ate
dom
estic
exc
ess b
urde
n in
crea
ses f
rom
3.7
per
cent
to 9
.1 p
erce
nt o
f ta
x
reve
nue.
For
eign
real
nat
iona
l inc
ome
incr
ease
s by
5.2
perc
ent o
f the
reve
nue,
so fo
reig
n
resi
dent
s rec
eive
a n
et b
enef
it fr
om th
e ta
x.
Thus
, agg
rega
te fo
reig
n w
elfa
re is
impr
oved
by
the
dom
estic
cor
pora
te ta
x w
hen
the
dom
estic
cou
ntry
is a
net
inte
rnat
iona
l len
der.
Agg
rega
te d
omes
tic w
elfa
re fa
lls.
That
inte
rnat
iona
l tra
nsfe
r occ
urs b
ecau
se fo
reig
n la
bor a
nd la
ndow
ners
ben
efit
from
the
sam
e
incr
ease
d st
ock
of fo
reig
n ca
pita
l as w
hen
the
two
coun
tries
are
equ
ally
wea
lthy,
but
the
dom
estic
cap
ital o
wne
rs n
ow b
ear a
gre
ater
shar
e of
the
burd
en b
ecau
se th
ey o
wn
a la
rger
shar
e
of th
e w
orld
cap
ital s
tock
. Th
e fo
reig
n ca
pita
l ow
ners
bea
r a sm
alle
r sha
re o
f the
bur
den.
The
aggr
egat
e in
tern
atio
nal b
urde
n is
shift
ed in
the
oppo
site
dire
ctio
n if
the
dom
estic
coun
try is
a n
et in
tern
atio
nal b
orro
wer
. Su
ppos
e th
at th
e do
mes
tic re
side
nts o
wn
only
25
perc
ent
of th
e w
orld
cap
ital s
tock
. In
that
cas
e (T
able
5),
som
e of
the
dom
estic
tax
burd
en is
exp
orte
d
and
the
wor
ldw
ide
exce
ss b
urde
n is
slig
htly
low
er th
an in
the
base
cas
e, b
ecau
se fo
reig
n
cons
umer
pric
es a
re lo
wer
than
dom
estic
con
sum
er p
rices
in th
e ne
w e
quili
briu
m.
In su
mm
ary,
an
aggr
egat
e be
nefit
is e
xpor
ted
if th
e do
mes
tic c
ount
ry is
a n
et in
tern
atio
nal
lend
er.
An
aggr
egat
e bu
rden
is e
xpor
ted
if th
e do
mes
tic c
ount
ry is
a n
et in
tern
atio
nal b
orro
wer
.
28
Rec
all t
hat t
hose
sect
ors a
re th
e co
rpor
ate
sect
ors t
hat p
rodu
ce in
tern
atio
nally
trad
eabl
e ou
tput
s. T
he fo
reig
nan
d do
mes
tic o
utpu
ts o
f sec
tor o
ne a
re p
erfe
ct su
bstit
utes
and
the
fore
ign
and
dom
estic
out
puts
of s
ecto
r tw
o ar
eim
perf
ect s
ubst
itute
s.
-34-
The
dom
estic
cor
pora
te in
com
e ta
x ca
n al
so a
ffec
t the
inte
rnat
iona
l dis
tribu
tion
of in
com
e
if th
e ca
pita
l int
ensi
ties a
re n
ot e
qual
for p
rodu
ctio
n w
ithin
sect
ors o
ne a
nd tw
o.28
Tho
se
inte
rnat
iona
l spi
llove
r eff
ects
can
als
o go
eith
er w
ay d
epen
ding
on
whe
ther
sect
or tw
o is
mor
e or
less
cap
ital-i
nten
sive
than
sect
or o
ne.
How
ever
, the
eff
ects
of a
lterin
g th
e re
lativ
e ca
pita
l
inte
nsiti
es a
re m
ore
com
plic
ated
than
the
effe
cts o
f cha
ngin
g th
e sh
ares
of c
apita
l ow
ners
hip.
Thos
e co
mpl
icat
ions
aris
e be
caus
e bo
th n
atio
nal a
nd su
bnat
iona
l dis
tribu
tions
of t
he ta
x bu
rden
s
are
mod
ified
by
a ch
ange
in th
e as
sum
ptio
ns a
bout
rela
tive
capi
tal i
nten
sitie
s.
Firs
t, su
ppos
e th
at se
ctor
two
is m
ore
capi
tal-i
nten
sive
than
sect
or o
ne.
Supp
ose
that
capi
tal’s
initi
al sh
are
equa
ls 2
0 pe
rcen
t of t
he v
alue
add
ed in
sect
or tw
o, ra
ther
than
18
perc
ent
(as i
n Ta
ble
1, th
e ba
se c
ase)
. In
add
ition
, sup
pose
that
sect
or o
ne a
ccou
nts f
or 2
5 pe
rcen
t of t
he
valu
e ad
ded
by th
e fir
st tw
o se
ctor
s com
bine
d, a
nd th
at th
e se
ctor
one
cap
ital s
hare
is o
nly
12
perc
ent r
athe
r tha
n 18
per
cent
(as i
n Ta
ble
1, th
e ba
se c
ase)
. U
nder
thos
e as
sum
ptio
ns, t
he
aggr
egat
e ca
pita
l int
ensi
ty a
nd o
utpu
t sha
res o
f sec
tors
one
and
two
com
bine
d ar
e th
e sa
me
as in
the
base
cas
e. A
ll ot
her s
hare
s are
als
o un
chan
ged.
Und
er th
ose
alte
rnat
ive
assu
mpt
ions
, dom
estic
labo
r bea
rs a
smal
ler s
hare
of t
he b
urde
n
(Tab
le 5
) tha
n in
the
base
cas
e. D
omes
tic la
bor b
ears
59
perc
ent r
athe
r tha
n73.
7 pe
rcen
t of t
he
burd
en.
Dom
estic
labo
r’s s
hare
of t
he b
urde
n is
smal
ler b
ecau
se th
e do
mes
tic w
age
rate
falls
by
less
than
in th
e ba
se c
ase
and
the
rate
of r
etur
n pa
id to
cap
ital o
wne
rs fa
lls b
y sl
ight
ly m
ore
than
in th
e ba
se c
ase
(Tab
le 6
). T
he d
omes
tic w
age
rate
falls
by
less
mos
tly b
ecau
se se
ctor
one
prod
uctio
n is
mor
e la
bor-
inte
nsiv
e th
an it
is in
the
base
cas
e. A
s des
crib
ed b
y Eq
uatio
n (2
a),
whe
n se
ctor
one
is m
ore
labo
r-in
tens
ive,
the
wag
e ra
te d
oes n
ot h
ave
to fa
ll by
as m
uch
to fu
lly
Page 120
29 T
he im
porta
nce
of la
bor i
nten
sity
in se
ctor
one
is sh
own
by e
quat
ion
(4) a
nd is
exp
lain
ed in
the
disc
ussi
on th
atfo
llow
s tha
t equ
atio
n.
-35-
offs
et th
e in
crea
sed
cost
of c
apita
l in
that
sect
or.
In a
dditi
on, t
he d
omes
tic c
orpo
rate
cos
t of
capi
tal i
ncre
ases
by
slig
htly
less
than
in th
e ba
se c
ase
beca
use
sect
or o
ne is
now
mor
e la
bor-
inte
nsiv
e.29
Als
o un
der t
hose
alte
rnat
ive
assu
mpt
ions
, com
pare
d w
ith th
e ba
se c
ase,
dom
estic
ow
ners
of c
apita
l bea
r a la
rger
shar
e of
the
burd
en im
pose
d on
wor
ldw
ide
capi
tal o
wne
rs (T
able
5)
beca
use
the
dom
estic
ow
ners
of c
apita
l mus
t pay
hig
her c
onsu
mer
pric
es th
an b
efor
e, w
here
as
fore
ign
capi
tal o
wne
rs p
ay sl
ight
ly le
ss fo
r con
sum
er g
oods
than
in th
e ba
se c
ase.
Dom
estic
cons
umer
pric
es n
ow ri
se b
y 0.
11 p
erce
nt ra
ther
than
falli
ng b
y 0.
11 p
erce
nt, a
s in
the
base
cas
e
(Tab
le 6
). In
con
trast
, for
eign
con
sum
er p
rices
dec
line
by sl
ight
ly m
ore
(-0.
18 p
erce
nt) t
han
in
the
base
cas
e (-
0.16
per
cent
).
Ove
rall,
whe
n se
ctor
two
is m
ore
capi
tal-i
nten
sive
than
sect
or o
ne, s
ome
of th
e ag
greg
ate
burd
en o
f the
tax
is e
xpor
ted
(Tab
le 5
). F
orei
gn re
side
nts b
ear a
n ag
greg
ate
burd
en e
qual
to 8
.7
perc
ent o
f the
reve
nue.
Dom
estic
resi
dent
s bea
r an
aggr
egat
e bu
rden
equ
al to
just
94.
9 pe
rcen
t of
the
reve
nue.
The
eff
ect t
hat t
he d
omes
tic c
orpo
rate
tax
has o
n th
e fo
reig
n su
bnat
iona
l
dist
ribut
ion
of in
com
e is
als
o le
ss p
rono
unce
d th
an in
the
base
cas
e.
Alte
rnat
ivel
y, w
hen
sect
or tw
o is
less
cap
ital-i
nten
sive
than
sect
or o
ne, t
he a
ggre
gate
inte
rnat
iona
l eff
ect i
s rev
erse
d (T
able
5).
Dom
estic
labo
r bea
rs a
larg
er sh
are
of th
e bu
rden
(90.
6
perc
ent)
and
fore
ign
labo
r rec
eive
s a la
rger
ben
efit
(87.
8 pe
rcen
t) th
an in
the
base
cas
e.
Com
pare
d to
the
base
cas
e, th
e do
mes
tic c
apita
l ow
ner’
s bur
den
is sm
alle
r (26
.7 p
erce
nt) a
nd
fore
ign
capi
tal o
wne
r’s b
urde
n is
larg
er (7
8.2
perc
ent).
Ove
rall,
dom
estic
resi
dent
s bea
r 113
.9
perc
ent o
f the
dom
estic
cor
pora
te ta
x. F
orei
gn re
side
nts b
enef
it by
10.
1 pe
rcen
t of t
he re
venu
e.
30 M
elvi
n (1
982)
dis
cuss
es th
e ta
riff-
like
effe
cts o
f the
cor
pora
te in
com
e ta
x in
a m
uch
sim
pler
two-
sect
or tr
ade
mod
el w
ith n
o in
tern
atio
nal c
apita
l mob
ility
. Th
at si
mpl
er m
odel
mak
es it
eas
ier t
o un
ders
tand
the
sim
ilarit
y to
the
effe
cts o
f a ta
riff.
-36-
The
effe
ct o
f the
cor
pora
te ta
x on
the
inte
rnat
iona
l dis
tribu
tion
of in
com
es c
an b
e
unde
rsto
od, i
n pa
rt, b
y co
mpa
ring
it to
the
effe
ct o
f a d
omes
tic e
xpor
t tax
or s
ubsi
dy p
lace
d on
the
dom
estic
out
put o
f sec
tor t
wo.
Whe
n se
ctor
two
is m
ore
capi
tal-i
nten
sive
than
sect
or o
ne, t
he
corp
orat
e ta
x in
crea
ses t
he d
omes
tic p
rice
of o
utpu
t fro
m th
at se
ctor
and
dec
reas
es th
e pr
ice
of
outp
ut fr
om th
e co
rres
pond
ing
fore
ign
sect
or.
That
impr
ovem
ent i
n th
e in
tern
atio
nal t
erm
s of
trade
cre
ates
a b
enef
it fo
r the
dom
estic
resi
dent
s at t
he e
xpen
se o
f for
eign
resi
dent
s. In
that
way
,
it ha
s an
effe
ct th
at is
sim
ilar t
o an
ad
valo
rem
tarif
f pla
ced
on th
e do
mes
tic e
xpor
ts fr
om th
at
sect
or.
Whe
n se
ctor
two
is le
ss c
apita
l-int
ensi
ve th
an se
ctor
one
, the
eff
ect i
s rev
erse
d. T
he
inte
rnat
iona
l ter
ms o
f tra
de a
re w
orse
ned
for d
omes
tic re
side
nts.
For
eign
resi
dent
s are
mad
e
bette
r off
at t
he e
xpen
se o
f dom
estic
resi
dent
s, si
mila
rly to
the
effe
ct o
f an
dom
estic
exp
ort
subs
idy
for t
he o
utpu
t of s
ecto
r tw
o. T
he si
mila
rity
to e
ither
an
expo
rt ta
riff o
r an
expo
rt su
bsid
y
is li
mite
d, h
owev
er, b
ecau
se th
e co
rpor
ate
tax
also
aff
ects
the
allo
catio
n of
cap
ital a
nd o
f inp
ut
and
outp
ut p
rices
in m
any
othe
r way
s tha
t diff
er fr
om th
e ef
fect
s of a
n ex
port
tax
or su
bsid
y.30
Rela
tive
Size
of t
he D
omes
tic E
cono
my
A c
hang
e in
the
assu
mpt
ion
abou
t the
size
of t
he d
omes
tic e
cono
my
rela
tive
to th
e w
orld
econ
omy
affe
cts b
oth
the
inci
denc
e an
d ef
ficie
ncy
of a
dom
estic
cor
pora
te ta
x. T
o ex
plor
e th
ose
effe
cts,
the
tax
burd
en sh
ares
can
be
mea
sure
d on
eith
er a
n ag
greg
ate
basi
s or a
per
cap
ita b
asis
.
Agg
rega
te b
urde
ns m
easu
re th
e to
tal e
ffec
ts o
f the
tax
on d
omes
tic a
nd fo
reig
n re
side
nts,
expr
esse
d as
shar
es o
f tot
al d
omes
tic re
venu
e. P
er c
apita
bur
dens
are
exp
ress
ed, i
nste
ad, a
s per
capi
ta sh
ares
of t
he d
omes
tic p
er c
apita
reve
nue.
Dom
estic
bur
den
shar
es h
ave
the
sam
e va
lues
Page 121
31 C
ompu
tatio
ns fo
r Tab
les 7
and
8 u
se th
e sa
me
assu
mpt
ions
as t
he b
ase
case
for t
he U
nite
d St
ates
. It
is a
ssum
edth
at th
e po
pula
tions
are
pro
porti
onal
to th
e si
zes o
f the
eco
nom
ies.
32
Dom
estic
cap
ital o
wne
rs b
ear a
slig
htly
hig
her b
urde
n th
an fo
reig
n ca
pita
l ow
ners
, bec
ause
dom
estic
con
sum
erpr
ices
incr
ease
by
mor
e th
an fo
reig
n co
nsum
er p
rices
.
-37-
eith
er w
ay, b
ut fo
reig
n pe
r cap
ita sh
ares
acc
ount
for t
he fa
ct th
at w
hen
dom
estic
out
put i
s a
smal
ler s
hare
of w
orld
out
put,
the
dom
estic
reve
nue
is sm
alle
r and
the
fore
ign
burd
en is
div
ided
amon
g a
larg
er n
umbe
r of f
orei
gn in
divi
dual
s. F
or e
xam
ple,
whe
n th
e do
mes
tic e
cono
my
is o
nly
1 pe
rcen
t of t
he w
orld
eco
nom
y, fo
reig
n la
bor’
s tot
al b
enef
it is
abo
ut th
e sa
me
as d
omes
tic
labo
r’s t
otal
loss
(Tab
le 7
), bu
t for
eign
labo
r’s p
er c
apita
gai
n is
less
than
1 p
erce
nt o
f dom
estic
labo
r’s p
er c
apita
loss
(Tab
le 8
).31 C
hang
es in
a v
ery
smal
l cou
ntry
can
not h
ave
muc
h of
an
effe
ct o
n ea
ch p
erso
n in
the
rest
of t
he w
orld
.
Dom
estic
labo
r bea
rs m
ore
than
100
per
cent
of t
he b
urde
n w
hen
the
dom
estic
eco
nom
y
prod
uces
less
than
5 p
erce
nt o
f wor
ld o
utpu
t (Ta
ble
8).
For s
uch
a sm
all e
cono
my,
bot
h do
mes
tic
labo
r and
dom
estic
cap
ital o
wne
rs w
ould
be
bette
r off
und
er a
dom
estic
tax
on w
ages
. W
heth
er
that
smal
l cou
ntry
cho
oses
to im
pose
a c
orpo
rate
inco
me
tax
has o
nly
a sm
all e
ffec
t on
fore
ign
indi
vidu
als.
Whe
n bu
rden
is m
easu
red
on a
per
cap
ita b
asis
, the
shar
es b
orne
by
dom
estic
and
fore
ign
labo
r and
cap
ital c
orre
late
clo
sely
with
the
rela
tive
size
of t
he d
omes
tic e
cono
my
(Tab
le 8
). T
he
per c
apita
bur
dens
impo
sed
on in
divi
dual
cap
ital o
wne
rs, d
omes
tic o
r for
eign
, are
roug
hly
equa
l
to th
e do
mes
tic e
cono
my’
s sha
re o
f wor
ld o
utpu
t.32 D
omes
tic la
bor’
s per
cap
ita sh
are
of th
e
burd
en is
slig
htly
hig
her t
han
the
fore
ign
econ
omy’
s sha
re o
f wor
ld o
utpu
t. F
orei
gn la
bor’
s per
capi
ta sh
are
of th
e bu
rden
is sl
ight
ly a
bove
the
dom
estic
eco
nom
y’s s
hare
of w
orld
out
put.
The
exce
ss b
urde
n, m
easu
red
as a
shar
e of
reve
nue,
is la
rges
t whe
n th
e do
mes
tic
econ
omy
is sm
alle
st.
That
exc
ess a
rises
bec
ause
the
corp
orat
e ta
x ca
uses
cap
ital t
o be
allo
cate
d
33 S
ee C
oakl
ey, K
ulas
i, an
d Sm
ith (1
998)
and
Coa
kley
, Fue
rtes,
and
Spag
nolo
(200
4).
34 S
ee O
bstfe
ld a
nd R
ogof
f (19
96),
pp. 1
61-1
64.
-38-
inef
ficie
ntly
aw
ay fr
om th
e do
mes
tic c
orpo
rate
sect
or a
nd o
ut o
f the
dom
estic
eco
nom
y. B
oth
sour
ces o
f ine
ffic
ienc
y be
com
e sm
alle
r rel
ativ
e to
dom
estic
reve
nue
as th
e do
mes
tic e
cono
my
is
assu
med
to b
e re
lativ
ely
larg
er (n
ot sh
own
in T
able
8).
In th
e lim
it, w
hen
the
dom
estic
eco
nom
y
is th
e w
hole
wor
ld, o
nly
the
dom
estic
mis
allo
catio
n of
cap
ital r
emai
ns.
The
exce
ss b
urde
n eq
uals
4.8
perc
ent o
f rev
enue
whe
n th
e do
mes
tic e
cono
my
is o
nly
1 pe
rcen
t of t
he w
orld
, but
onl
y 1.
2
perc
ent o
f rev
enue
whe
n th
e do
mes
tic e
cono
my
is th
e w
hole
wor
ld.
Of c
ours
e, 1
.2 p
erce
nt o
f
reve
nue
colle
cted
if e
very
cou
ntry
impo
sed
the
sam
e co
rpor
ate
tax
wou
ld b
e m
uch
larg
er th
an 4
.8
perc
ent o
f rev
enue
col
lect
ed b
y a
coun
try th
at m
akes
up
only
1 p
erce
nt o
f the
wor
ld e
cono
my.
Cap
ital M
obili
ty
Thro
ugho
ut th
is st
udy,
cap
ital i
s ass
umed
to b
e pe
rfec
tly m
obile
in th
e se
nse
that
the
mar
gina
l ret
urn
to in
vest
men
t, ex
clud
ing
prod
ucer
-leve
l tax
es, i
s the
sam
e th
roug
hout
the
wor
ld.
The
ques
tion
abou
t the
true
deg
ree
of in
tern
atio
nal c
apita
l mob
ility
is u
nres
olve
d, e
spec
ially
sinc
e th
e w
ork
of F
elds
tein
and
Hor
ioka
(198
0), w
ho d
isco
vere
d a
high
and
ver
y ro
bust
corr
elat
ion
betw
een
natio
nal i
nves
tmen
t and
nat
iona
l sav
ings
, whi
ch su
gges
ted
that
cap
ital w
as
not v
ery
mob
ile.
How
ever
, mor
e re
cent
wor
k su
gges
ts th
at th
e Fe
ldst
ein-
Hor
ioka
resu
lt is
not
as
robu
st a
s onc
e be
lieve
d.33
Mor
eove
r, it
is n
ot c
lear
exa
ctly
wha
t the
Fel
dste
in a
nd H
orio
ka
impl
ies a
bout
the
degr
ee o
f cap
ital m
obili
ty.34
How
ever
, giv
en th
at a
sign
ifica
nt le
vel o
f
unce
rtain
ty a
nd d
isag
reem
ent a
mon
g ec
onom
ists
rem
ains
, it i
s im
porta
nt to
con
side
r the
pos
sibl
e
impl
icat
ions
of i
mpe
rfec
t int
erna
tiona
l cap
ital m
obili
ty.
Page 122
35 I
n th
e lim
it, d
omes
tic c
apita
l ow
ners
bea
r the
full
burd
en o
f the
cor
pora
te ta
x w
hen
the
dom
estic
eco
nom
y is
the
entir
e w
orld
, the
tax
rate
is in
finite
sim
ally
smal
l (no
exc
ess b
urde
n), a
nd th
e ga
in to
land
is d
istri
bute
d to
labo
r and
capi
tal o
wne
rs in
pro
porti
on to
thei
r ini
tial i
ncom
e sh
ares
. Th
at re
sult
coin
cide
s with
the
cent
ral c
ase
in H
arbe
rger
(196
2) fo
r the
clo
sed
econ
omy.
-39-
It is
pos
sibl
e, a
s in
Mut
ti an
d G
rube
rt (1
985)
and
Gra
velle
and
Sm
ette
rs (2
006)
, to
mod
el
inte
rnat
iona
l cap
ital m
obili
ty b
y as
sum
ing
that
indi
vidu
al in
vest
ors d
o no
t sub
stitu
te p
erfe
ctly
betw
een
fore
ign
and
dom
estic
inve
stm
ents
. H
owev
er, t
hat s
trate
gy c
ompl
icat
es th
e an
alys
is
cons
ider
ably
and
is n
ot n
eces
saril
y th
e be
st w
ay to
cha
ract
eriz
e th
e be
havi
or o
f the
mar
gina
l
inve
stor
in a
long
-run
equ
ilibr
ium
. A
n al
tern
ativ
e an
d m
uch
sim
pler
app
roac
h to
cha
ngin
g th
e
degr
ee o
f cap
ital m
obili
ty is
to im
agin
e th
at th
e re
st o
f the
wor
ld is
smal
ler,
in w
hich
cas
e th
ere
wou
ld b
e fe
wer
opp
ortu
nitie
s for
cap
ital t
o be
real
loca
ted
abro
ad.
In th
at c
ase,
any
inte
rnat
iona
l
real
loca
tion
of c
apita
l aw
ay fr
om th
e do
mes
tic e
cono
my
driv
es d
own
the
mar
gina
l ret
urn
to
inve
stm
ent a
t a h
ighe
r rat
e pe
r uni
t of r
eallo
cate
d ca
pita
l. T
hat p
heno
men
on c
ause
s les
s cap
ital
to b
e re
allo
cate
d ab
road
in re
spon
se to
the
dom
estic
cor
pora
te ta
x, in
a w
ay th
at is
sim
ilar t
o th
e
effe
ct o
f ass
umin
g th
at d
omes
tic a
nd fo
reig
n in
vest
men
ts a
re n
ot p
erfe
ct su
bstit
utes
for i
nves
tors
.
In e
ffec
t, th
e m
argi
nal i
nves
tor i
s stil
l ass
umed
to b
e in
diff
eren
t bet
wee
n do
mes
tic a
nd fo
reig
n
inve
stm
ents
that
pay
the
sam
e ra
te o
f ret
urn,
but
onl
y fo
r inv
estm
ents
in so
me
of th
e co
untri
es –
perh
aps b
etw
een
the
high
ly in
dust
rializ
ed c
ount
ries.
For
oth
er c
ount
ries,
they
are
com
plet
ely
unw
illin
g to
subs
titut
e be
twee
n do
mes
tic a
nd fo
reig
n in
vest
men
ts a
t any
rela
tive
rate
s of r
etur
n.
As c
apita
l mob
ility
is re
duce
d in
that
way
, dom
estic
labo
r’s s
hare
of t
he c
orpo
rate
bur
den
beco
mes
smal
ler a
nd d
omes
tic c
apita
l’s sh
are
of th
e bu
rden
bec
omes
larg
er.
For e
xam
ple,
whe
n
the
dom
estic
eco
nom
y is
incr
ease
d fr
om 3
0 pe
rcen
t of t
he w
orld
eco
nom
y to
70
perc
ent o
f the
wor
ld e
cono
my,
dom
estic
labo
r’s s
hare
falls
from
73.
7 pe
rcen
t to
32.5
per
cent
(Tab
le 8
).
Dom
estic
cap
ital’s
shar
e of
the
burd
en in
crea
ses f
rom
32.
5 pe
rcen
t to
72.7
per
cent
.35 B
ecau
se
36 S
ee C
ongr
essi
onal
Bud
get O
ffic
e (2
005a
) and
Dev
ereu
x, G
riffit
h, a
nd K
lem
m (2
002)
.
-40-
capi
tal i
s les
s mob
ile w
hen
the
dom
estic
eco
nom
y pr
ovid
es 7
0 pe
rcen
t of t
he w
orld
’s in
vest
men
t
oppo
rtuni
ties t
o do
mes
tic c
apita
l ow
ners
, the
arc
ela
stic
ity o
f the
dom
estic
cap
ital s
tock
with
resp
ect t
o th
e co
rpor
ate
tax
falls
from
-0.3
2 to
-0.1
3.
The
degr
ee o
f lon
g-ru
n in
tern
atio
nal c
apita
l mob
ility
is st
ill a
n un
reso
lved
que
stio
n.
Cle
arly
, the
ans
wer
to th
at q
uest
ion
is c
ruci
al fo
r und
erst
andi
ng th
e lo
ng-r
un in
cide
nce
of th
e
corp
orat
e in
com
e ta
x in
an
open
eco
nom
y.
Tax
Com
petit
ion
Alth
ough
man
y co
untri
es im
pose
cor
pora
te in
com
e ta
xes,
the
corp
orat
e ta
x ra
tes h
ave
decr
ease
d ov
er th
e pa
st 2
5 ye
ars.36
Cou
ntry
com
petit
ion
caus
ed b
y in
tern
atio
nal s
pillo
ver e
ffec
ts
mig
ht h
elp
expl
ain
why
cou
ntrie
s hav
e di
ffer
ent c
orpo
rate
tax
rate
s, bu
t it i
s not
cle
ar h
ow th
ose
spill
over
s wou
ld e
xpla
in th
e ob
serv
ed d
ownw
ard
trend
in c
orpo
rate
tax
rate
s.
The
poss
ibili
ty o
f tar
iff-li
ke c
ompe
titio
n se
ems t
o le
ad in
the
wro
ng d
irect
ion.
If t
he
corp
orat
e in
com
e ta
x ha
s tar
iff-li
ke e
ffec
ts th
at a
llow
cou
ntrie
s to
expo
rt so
me
of th
eir c
orpo
rate
tax
burd
ens,
the
corp
orat
e ta
x ca
n se
rve
as a
subs
titut
e fo
r tar
iff c
ompe
titio
n w
hen
tarif
fs a
re
limite
d by
inte
rnat
iona
l tra
de a
gree
men
ts.
But
tarif
f com
petit
ion
is u
nlik
ely
to e
xpla
in th
e
obse
rved
dow
nwar
d tre
nds i
n co
rpor
ate
tax
rate
s. T
o th
e ex
tent
that
the
corp
orat
e in
com
e ta
x
acts
as a
tarif
f sub
stitu
te, t
ariff
com
petit
ion
wou
ld m
otiv
ate
coun
tries
to in
crea
se th
eir c
orpo
rate
tax
rate
s as t
rade
agr
eem
ents
bec
ome
mor
e bi
ndin
g.
Spill
over
s tha
t res
ult f
rom
a c
ount
ry’s
net
inte
rnat
iona
l cap
ital p
ositi
on a
lso
do n
ot
obvi
ousl
y ex
plai
n th
e do
wnw
ard
trend
in c
orpo
rate
tax
rate
s. O
n an
agg
rega
te b
asis
, res
iden
ts o
f
Page 123
37 S
ee C
ongr
essi
onal
Bud
get O
ffic
e (2
005a
).
-41-
a co
untry
that
is a
net
inte
rnat
iona
l len
der w
ould
ben
efit
from
a re
duct
ion
in th
eir d
omes
tic
corp
orat
e ta
x ra
te (T
able
5).
By
that
sam
e ag
greg
ate
mea
sure
, how
ever
, res
iden
ts o
f a c
ount
ry
that
is a
net
inte
rnat
iona
l bor
row
er w
ould
ben
efit
from
an
incr
ease
in th
eir o
wn
corp
orat
e ta
x
rate
. C
ount
ries t
hat h
ave
grad
ually
redu
ced
thei
r cor
pora
te ta
x ra
tes i
nclu
de b
oth
net
inte
rnat
iona
l len
ders
and
net
inte
rnat
iona
l bor
row
ers,
so th
ose
spill
over
s pro
babl
y do
not
exp
lain
the
dow
nwar
d tre
nds.
Inte
rnat
iona
l spi
llove
rs th
at a
ffec
t the
subn
atio
nal d
istri
butio
ns o
f inc
ome
mig
ht e
xpla
in
part
of th
e ob
serv
ed tr
end,
but
eve
n th
e ro
le o
f tho
se sp
illov
ers i
s not
obv
ious
. If
, for
som
e
reas
on, o
ther
cou
ntrie
s red
uce
thei
r cor
pora
te ta
x ra
tes f
irst,
then
a c
ount
ry m
ight
redu
ce it
s ow
n
corp
orat
e ta
x ra
te to
pro
tect
its d
omes
tic w
orke
rs fr
om th
e po
tent
ial o
utflo
w o
f cap
ital.
How
ever
,
if th
at is
a c
ount
ry’s
mot
ivat
ion
for r
educ
ing
its c
orpo
rate
tax
rate
, the
n it
is n
ot c
lear
why
the
coun
try w
ould
wai
t for
oth
er c
ount
ries t
o re
duce
thei
r tax
es fi
rst.
Eve
n if
all c
ount
ries i
mpo
se a
corp
orat
e in
com
e ta
x, a
ny o
ne c
ount
ry c
ould
impr
ove
the
wel
fare
of i
ts d
omes
tic w
orke
rs b
y
redu
cing
its c
orpo
rate
tax.
Inst
ead
of ta
x co
mpe
titio
n, it
is p
ossi
ble
that
inte
rnat
iona
l cap
ital m
obili
ty h
as in
crea
sed
over
the
last
25
or 3
0 ye
ars,
and
that
cou
ntrie
s hav
e re
duce
d th
eir c
orpo
rate
tax
rate
s in
resp
onse
to th
at c
omm
on tr
end.
With
out c
apita
l mob
ility
, the
cor
pora
te in
com
e ta
x is
mor
e lik
ely
to b
e
born
e by
the
dom
estic
ow
ners
of c
apita
l. W
hen
capi
tal i
s mob
ile, a
cor
pora
te in
com
e ta
x is
bor
ne
mor
e he
avily
by
dom
estic
labo
r, es
peci
ally
for a
tax
impo
sed
by th
e sm
alle
st c
ount
ries.
Som
e of
thos
e sm
alle
st c
ount
ries h
ave
redu
ced
thei
r cor
pora
te ta
xes b
y th
e m
ost o
ver t
he p
ast 2
5 ye
ars.37
-42-
Perh
aps,
out o
f con
cern
for t
heir
dom
estic
labo
r, co
untri
es h
ave
resp
onde
d to
the
chan
ging
dist
ribut
iona
l con
sequ
ence
s of c
orpo
rate
tax
as c
apita
l mob
ility
has
incr
ease
d.
Alth
ough
the
mod
el d
oes n
ot e
xpla
in th
e ob
serv
ed tr
ends
in a
ny o
bvio
us m
anne
r, th
e
mod
el c
an b
e us
ed to
exp
lore
how
thos
e tre
nds m
ight
aff
ect t
he d
istri
butio
n of
tax
burd
ens.
The
pote
ntia
l eff
ects
can
be
obse
rved
bas
ed o
n th
e re
latio
n be
twee
n co
untry
size
and
the
per c
apita
burd
en sh
ares
(Tab
le 8
). T
o si
mpl
ify th
e an
alys
is, r
athe
r tha
n try
ing
to a
naly
ze g
radu
al c
hang
es
in c
orpo
rate
tax
rate
s, su
ppos
e th
at 9
0 pe
rcen
t of t
he w
orld
out
put i
s pro
duce
d in
cou
ntrie
s tha
t
impo
se a
cor
pora
te in
com
e ta
x, a
nd th
at re
al ta
x ha
vens
pro
duce
the
othe
r 10
perc
ent.
Initi
ally
,
on a
n av
erag
e pe
r cap
ita b
asis
, wor
kers
in th
e co
untri
es th
at a
re n
ot ta
x ha
vens
bea
r onl
y 12
.3
perc
ent o
f the
cor
pora
te ta
x bu
rden
com
pare
d to
an
equi
libriu
m in
whi
ch n
one
of th
ose
coun
tries
impo
ses a
cor
pora
te in
com
e ta
x. W
orke
rs in
the
tax-
have
n co
untri
es re
ceiv
e an
ave
rage
per
capi
ta b
enef
it eq
ual t
o 89
.7 p
erce
nt o
f the
per
cap
ita re
venu
e.
Alth
ough
the
aver
age
labo
r sha
re o
f the
bur
den
is sm
all i
n th
e co
untri
es th
at a
re n
ot ta
x
have
ns, t
hat b
urde
n ca
n be
muc
h la
rger
whe
n it
is m
easu
red
at th
e m
argi
n fo
r a c
ount
ry d
ecid
ing
whe
ther
to im
pose
a c
orpo
rate
inco
me
tax.
Fo
r a sm
all c
ount
ry th
at is
not
a ta
x ha
ven,
dom
estic
labo
r’s b
enef
it fr
om e
limin
atin
g its
ow
n co
rpor
ate
tax
wou
ld e
qual
102
per
cent
of i
ts d
omes
tic
reve
nue
from
the
tax:
the
diff
eren
ce b
etw
een
the
aver
age
burd
en o
f 12.
3 pe
rcen
t with
in th
e
coun
tries
that
are
not
tax
have
ns a
nd th
e av
erag
e pe
r cap
ita b
enef
it of
89.
7 pe
rcen
t with
in th
e ta
x-
have
n co
untri
es.
From
a d
istri
butio
nal p
ersp
ectiv
e, it
mak
es li
ttle
diff
eren
ce w
heth
er th
at sm
all
coun
try is
the
only
cou
ntry
to h
ave
a co
rpor
ate
inco
me
tax
or is
just
one
am
ong
man
y co
untri
es
that
tax
corp
orat
e in
com
e, a
s lon
g as
cou
ntrie
s can
cho
ose
thei
r tax
pol
icie
s ind
epen
dent
ly.
That
is a
lso
true
for l
arge
r cou
ntrie
s. F
or e
xam
ple,
in a
cou
ntry
that
is n
ot a
tax
have
n an
d th
at
Page 124
-43-
prod
uces
20
perc
ent o
f wor
ld o
utpu
t, do
mes
tic la
bor’
s bur
den
at th
e m
argi
n w
ould
equ
al 8
2.6
perc
ent (
12.3
per
cent
+70
.3 p
erce
nt) o
f the
dom
estic
cor
pora
te ta
x re
venu
e.
If c
ount
ries m
ove
into
the
tax-
have
n gr
oup,
labo
r’s a
vera
ge p
er c
apita
ben
efit
falls
for
resi
dent
s of t
he ta
x-ha
ven
coun
tries
and
rise
s for
resi
dent
s of t
he o
ther
cou
ntrie
s. F
or e
xam
ple,
whe
n th
e ta
x-ha
ven
grou
p gr
ows f
rom
10
perc
ent t
o 30
per
cent
of w
orld
pro
duct
ion,
labo
r’s
aver
age
per c
apita
ben
efit
falls
from
89.
7 pe
rcen
t to
70.3
per
cent
for r
esid
ents
of t
he ta
x ha
vens
.
Labo
r’s a
vera
ge p
er c
apita
bur
den
rises
from
12.
3 pe
rcen
t to
32.5
per
cent
for r
esid
ents
of t
he
coun
tries
that
are
not
tax
have
ns.
Alth
ough
the
mod
el d
oes n
ot o
bvio
usly
pro
vide
a th
eory
of t
ax c
ompe
titio
n th
at w
ould
expl
ain
the
obse
rved
tren
ds in
cor
pora
te ta
x ra
tes o
ver t
he p
ast 2
5 or
30
year
s, th
e an
alys
is d
oes
sugg
est t
hat t
hose
tren
ds c
an sh
ift th
e bu
rden
s of t
he c
orpo
rate
inco
me
tax
in a
n op
en e
cono
my.
Such
shift
s mig
ht h
elp
expl
ain
coun
try m
otiv
atio
ns th
at u
nder
lie th
e ob
serv
ed in
tern
atio
nal t
rend
s
in c
orpo
rate
tax
polic
ies.
VII
I.C
oncl
usio
ns
The
anal
ysis
show
s how
the
dom
estic
ow
ners
of c
apita
l can
esc
ape
mos
t of t
he c
orpo
rate
inco
me
tax
burd
en w
hen
capi
tal i
s rea
lloca
ted
abro
ad in
resp
onse
to th
e ta
x. B
ut, a
s in
Bra
dfor
d
(197
8), c
apita
l ow
ners
wor
ldw
ide
do n
ot e
scap
e th
e ta
x. R
eallo
catio
n of
cap
ital a
broa
d dr
ives
dow
n th
e pe
rson
al re
turn
to in
vest
men
t so
that
cap
ital o
wne
rs w
orld
wid
e be
ar a
ppro
xim
atel
y th
e
full
burd
en o
f the
dom
estic
cor
pora
te in
com
e ta
x. F
orei
gn w
orke
rs b
enef
it be
caus
e an
incr
ease
d
fore
ign
stoc
k of
cap
ital r
aise
s the
ir pr
oduc
tivity
and
thei
r wag
es.
Dom
estic
wor
kers
lose
bec
ause
thei
r pro
duct
ivity
falls
and
they
can
not e
mig
rate
to ta
ke a
dvan
tage
of h
ighe
r for
eign
wag
es.
-44-
Und
er b
asic
ass
umpt
ions
of t
he n
umer
ical
app
licat
ion,
the
outc
ome
is a
lso
sim
ilar t
o th
e
impl
icat
ions
of t
he si
mpl
er m
odel
of B
radf
ord
in th
e se
nse
that
the
full
wor
ldw
ide
burd
en fa
lls o
n
dom
estic
ow
ners
of p
rodu
ctiv
e in
puts
.
Bur
dens
are
mea
sure
d by
subs
titut
ing
fact
or sh
ares
and
out
put s
hare
s tha
t are
reas
onab
le
for t
he U
.S. e
cono
my.
Giv
en th
ose
valu
es, w
hen
capi
tal i
s per
fect
ly m
obile
and
the
tax
does
not
affe
ct th
e w
orld
pric
es o
f tra
ded
good
s, do
mes
tic la
bor b
ears
slig
htly
mor
e th
an 7
0 pe
rcen
t of t
he
long
run
burd
en o
f the
cor
pora
te in
com
e ta
x. T
he d
omes
tic o
wne
rs o
f cap
ital b
ear s
light
ly m
ore
than
30
perc
ent o
f the
bur
den.
Dom
estic
land
owne
rs re
ceiv
e a
smal
l ben
efit.
At t
he sa
me
time,
the
fore
ign
owne
rs o
f cap
ital b
ear s
light
ly m
ore
than
70
perc
ent o
f the
bur
den,
but
thei
r bur
den
is
exac
tly o
ffse
t by
the
bene
fits r
ecei
ved
by fo
reig
n w
orke
rs a
nd la
ndow
ners
. W
hen
capi
tal i
s les
s
mob
ile in
tern
atio
nally
, dom
estic
labo
r’s b
urde
n is
low
er a
nd d
omes
tic c
apita
l’s b
urde
n is
hig
her.
Bur
dens
can
als
o be
aff
ecte
d by
the
dom
estic
cou
ntry
’s a
bilit
y to
influ
ence
the
wor
ld p
rices
of
som
e tra
ded
corp
orat
e ou
tput
s, bu
t the
sign
s and
mag
nitu
des o
f tho
se c
hang
es d
epen
d up
on th
e
rela
tive
capi
tal i
nten
sitie
s of p
rodu
ctio
n in
the
corp
orat
e se
ctor
s tha
t pro
duce
inte
rnat
iona
lly
trada
ble
good
s.
That
dis
tribu
tion
of b
urde
ns is
qui
te d
iffer
ent f
rom
the
pred
ictio
ns o
f Har
berg
er’s
(196
2)
clos
ed-e
cono
my
anal
ysis
, w
hich
impl
ies t
hat d
omes
tic c
apita
l ow
ners
bea
r the
ent
ire U
.S.
corp
orat
e in
com
e ta
x in
the
long
run.
Tho
se c
lose
d-ec
onom
y pr
edic
tions
still
app
ly to
the
wor
ld
as a
who
le.
But
in a
n op
en e
cono
my,
the
tax
caus
es in
com
e to
be
redi
strib
uted
inte
rnat
iona
lly
betw
een
fore
ign
and
dom
estic
ow
ners
of c
apita
l, an
d in
trana
tiona
lly b
etw
een
the
labo
r and
capi
tal o
wne
rs re
side
nt w
ithin
eac
h co
untry
. Fo
reig
n ow
ners
of c
apita
l bea
r the
dom
estic
Page 125
-45-
corp
orat
e in
com
e ta
x ro
ughl
y in
pro
porti
on to
thei
r ow
ners
hip
of th
e w
orld
cap
ital s
tock
.
Fore
ign
labo
r ben
efits
by
abou
t tha
t sam
e am
ount
.
In a
dditi
on to
its e
ffec
ts o
n th
e do
mes
tic a
nd fo
reig
n su
bnat
iona
l dis
tribu
tions
of i
ncom
e,
a co
rpor
ate
inco
me
tax
can
redi
strib
ute
the
aggr
egat
e na
tiona
l inc
omes
bet
wee
n do
mes
tic a
nd
fore
ign
resi
dent
s. F
or e
xam
ple,
to th
e ex
tent
that
the
taxi
ng c
ount
ry is
a n
et in
tern
atio
nal l
ende
r,
its c
orpo
rate
inco
me
tax
can
trans
fer n
atio
nal i
ncom
es a
way
from
dom
estic
resi
dent
s tow
ard
fore
ign
resi
dent
s. A
ltern
ativ
ely,
whe
n th
e ta
cou
ntry
is a
net
inte
rnat
iona
l bor
row
er, t
he
inte
rnat
iona
l tra
nsfe
r is r
ever
sed:
Par
t of t
he a
ggre
gate
tax
burd
en is
exp
orte
d to
fore
ign
resi
dent
s. B
ut o
nly
capi
tal o
wne
rs a
re a
ffec
ted
by th
e ag
greg
ate
inte
rnat
iona
l tra
nsfe
rs th
at o
ccur
whe
n th
e co
untry
is e
ither
a n
et in
tern
atio
nal l
ende
r or b
orro
wer
; lab
or’s
bur
den
is u
naff
ecte
d.
Sim
ilarly
, the
cor
pora
te in
com
e ta
x ca
n re
dist
ribut
e na
tiona
l inc
omes
in a
way
that
is li
ke
an a
d va
lore
m ta
riff o
n ex
ports
, as i
n W
halle
y (1
980)
. H
owev
er, t
he si
ze a
nd d
irect
ion
of th
at
effe
ct d
epen
d up
on th
e re
lativ
e ca
pita
l int
ensi
ties o
f pro
duct
ion
for i
nter
natio
nally
trad
able
corp
orat
e ou
tput
s tha
t are
impe
rfec
t sub
stitu
tes f
or th
eir f
orei
gn p
rodu
ced
coun
terp
arts
. W
hen
that
pro
duct
ion
is m
ore
capi
tal-i
nten
sive
than
pro
duct
ion
of th
e ot
her t
rada
ble
corp
orat
e ou
tput
s,
a co
rpor
ate
inco
me
tax
shift
s nat
iona
l inc
ome
tow
ard
dom
estic
resi
dent
s fro
m a
broa
d. I
n ef
fect
,
dom
estic
resi
dent
s ben
efit
from
thei
r ow
n co
untry
’s a
bilit
y to
exe
rt so
me
mar
ket p
ower
in
inte
rnat
iona
l tra
de b
y im
posi
ng a
cor
pora
te in
com
e ta
x. A
s sho
wn
in M
elvi
n (1
982)
and
Gra
velle
and
Sm
ette
rs (2
006)
, dom
estic
labo
r’s s
hare
of t
he ta
x bu
rden
can
be
low
er w
hen
the
dom
estic
cou
ntry
has
such
mar
ket p
ower
. H
owev
er, i
f pr
oduc
tion
of th
e im
perf
ect s
ubst
itute
s is
inst
ead
less
cap
ital-i
nten
sive
than
pro
duct
ion
of th
e ot
her t
rada
ble
corp
orat
e ou
tput
s, th
e ta
riff-
-46-
like
effe
cts o
f the
cor
pora
te in
com
e ta
x ar
e re
vers
ed: T
he ta
x sh
ifts n
atio
nal i
ncom
es to
war
d
fore
ign
resi
dent
s and
incr
ease
s dom
estic
labo
r’s b
urde
n.
This
stud
y al
so e
xam
ines
how
repl
acem
ent o
f the
cor
pora
te in
com
e ta
x by
any
of f
our
alte
rnat
ive
taxe
s wou
ld a
ffec
t the
dis
tribu
tion
of ta
x bu
rden
s:
!R
epla
cem
ent b
y a
gene
ral t
ax o
n in
com
e ge
nera
ted
by th
e us
e of
cap
ital w
ithin
all
dom
estic
sect
ors –
a ta
x th
at d
oes n
ot d
istin
guis
h be
twee
n co
rpor
ate
and
nonc
orpo
rate
inve
stm
ents
– sh
ifts a
bout
13
perc
ent o
f the
tax
burd
en a
way
from
dom
estic
labo
r tow
ard
dom
estic
cap
ital o
wne
rs.
!R
epla
cem
ent b
y a
tax
on d
omes
tic la
bor i
ncom
e sh
ifts t
he e
ntire
dom
estic
resi
dent
cap
ital
owne
rs’ b
urde
n to
war
d do
mes
tic la
bor.
Tha
t shi
ft in
crea
ses d
omes
tic la
bor’
s sha
re o
f the
burd
en b
y ab
out 2
6 pe
rcen
t of t
he ta
x re
venu
e.
!R
epla
cem
ent b
y a
tax
on th
e w
orld
wid
e ca
pita
l inc
ome
of d
omes
tic re
side
nts –
a ta
x th
at
achi
eves
cap
ital e
xpor
t neu
tralit
y –
shift
s the
ent
ire a
mou
nt o
f dom
estic
labo
r’s b
urde
n
tow
ard
the
dom
estic
ow
ners
of c
apita
l. T
hat s
hift
incr
ease
s the
dom
estic
resi
dent
cap
ital
owne
rs’ s
hare
of t
he b
urde
n by
abo
ut 6
8 pe
rcen
t of t
he ta
x re
venu
e. W
orld
wid
e, b
oth
labo
r and
cap
ital o
wne
rs b
enef
it sl
ight
ly fr
om a
n in
crea
sed
inve
stm
ent e
ffic
ienc
y un
der
that
repl
acem
ent t
ax, b
ut th
e la
rges
t cha
nges
are
in th
e re
dist
ribut
ion
of ta
x bu
rden
s
tow
ard
the
dom
estic
ow
ners
of c
apita
l aw
ay fr
om d
omes
tic la
bor,
and
away
from
fore
ign
owne
rs o
f cap
ital t
owar
d fo
reig
n la
bor.
!R
epla
cem
ent b
y an
y of
the
last
thre
e do
mes
tic p
erso
nal t
axes
wou
ld e
limin
ate
fore
ign
labo
r’s b
enef
it an
d th
e fo
reig
n re
side
nt c
apita
l ow
ners
’ bur
den,
equ
al to
abo
ut 7
0 pe
rcen
t
of th
e ta
x re
venu
e.
Page 126
-47-
The
mod
el d
oes n
ot p
rovi
de a
theo
ry o
f int
erna
tiona
l tax
com
petit
ion,
but
its p
redi
ctio
ns
offe
r ins
ight
s int
o ho
w th
e ta
x bu
rden
s are
redi
strib
uted
whe
n m
ore
than
one
cou
ntry
impo
ses a
corp
orat
e in
com
e ta
x. W
hen
mor
e co
untri
es im
pose
the
tax,
the
inte
rnat
iona
l eff
ects
are
less
pron
ounc
ed o
n av
erag
e w
ithin
thos
e ta
cou
ntrie
s and
mor
e pr
onou
nced
with
in th
e ot
her
coun
tries
, the
tax
have
ns.
If th
e ta
x ha
vens
acc
ount
for o
nly
a sm
all s
hare
of w
orld
pro
duct
ion,
labo
r’s b
urde
n is
als
o sm
all o
n av
erag
e fo
r res
iden
ts o
f the
cou
ntrie
s tha
t are
not
tax
have
ns.
But
labo
r’s b
enef
it ca
n be
larg
e on
ave
rage
for r
esid
ents
of t
he ta
x ha
vens
. Th
e be
nefit
from
redu
cing
the
tax
can
also
be
larg
e at
the
mar
gin
for w
orke
rs re
side
nt in
any
smal
l cou
ntry
that
is n
ot a
tax
have
n. T
hat m
argi
nal b
enef
it eq
uals
the
diff
eren
ce b
etw
een
labo
r’s b
urde
n fr
om re
sidi
ng in
a
coun
try th
at is
not
a ta
x ha
ven
and
labo
r’s b
enef
it fr
om re
sidi
ng in
a ta
x ha
ven.
Whe
n co
untri
es
are
adde
d to
the
tax-
have
n gr
oup,
the
aver
age
corp
orat
e ta
x bu
rden
s with
in th
e ex
istin
g ta
x-ha
ven
coun
tries
are
shift
ed to
war
d w
orke
rs a
nd a
way
from
thei
r res
iden
t cap
ital o
wne
rs.
As m
ore
coun
tries
bec
ome
tax
have
ns, w
orke
rs li
ving
in th
e co
untri
es th
at a
re n
ot ta
x ha
vens
acq
uire
an
incr
easi
ng a
vera
ge sh
are
of th
e bu
rden
. Th
e av
erag
e bu
rden
s are
redu
ced
for c
apita
l ow
ners
in
thos
e co
untri
es.
For a
cou
ntry
at t
he m
argi
n of
dec
idin
g w
heth
er to
impo
se o
r cha
nge
the
corp
orat
e in
com
e ta
x, h
owev
er, i
t mak
es a
lmos
t no
diff
eren
ce to
dom
estic
resi
dent
s whe
ther
othe
r cou
ntrie
s im
pose
cor
pora
te in
com
e ta
xes.
38 H
arbe
rger
(199
5), p
. 65.
-48-
App
endi
x: O
ther
Stu
dies
Har
berg
er
The
mod
el d
evel
oped
in th
is st
udy
is b
ased
on
Har
berg
er (1
995)
, but
the
resu
lts a
ppea
r
quite
diff
eren
t fro
m th
at st
udy.
Tha
t ear
lier s
tudy
pre
dict
ed th
at “
labo
r will
bea
r 2 to
2½
tim
es
the
full
burd
en o
f the
U.S
.” c
orpo
rate
inco
me
tax.
38 T
his s
tudy
pre
dict
s tha
t dom
estic
labo
r
wou
ld b
ear a
bout
74
perc
ent o
f the
cor
pora
te in
com
e ta
x un
der s
hare
ass
umpt
ions
app
ropr
iate
for
the
U.S
. eco
nom
y. T
he w
ide
gap
betw
een
thos
e pr
edic
tions
is e
xpla
ined
par
tly b
y a
diff
eren
ce in
assu
mpt
ions
abo
ut c
apita
l int
ensi
ties a
nd o
utpu
t sha
res.
But
mos
t of t
he d
iffer
ence
aris
es
beca
use
the
burd
ens a
re m
easu
red
diff
eren
tly.
The
Har
berg
er (1
995)
con
clus
ion
is b
ased
onl
y on
chan
ges i
n th
e so
urce
s of i
ncom
e, w
here
as th
is st
udy
com
bine
s the
eff
ects
on
both
sour
ces a
nd
uses
. A
rece
nt st
udy
by H
arbe
rger
(200
6) c
oncl
udes
that
dom
estic
labo
r bea
rs 9
6 pe
rcen
t of t
he
burd
en.
That
stud
y re
ache
s a c
oncl
usio
n di
ffer
ent f
rom
Har
berg
er (1
995)
mai
nly
beca
use
the
late
r stu
dy c
ombi
nes t
he e
ffec
ts o
n bo
th so
urce
s and
use
s in
its m
easu
re o
f bur
den,
but
als
o
beca
use
the
late
r stu
dy m
akes
slig
htly
diff
eren
t ass
umpt
ions
abo
ut th
e U
.S. e
cono
my.
Har
berg
er (1
995)
doe
s not
fully
spec
ify th
e ca
pita
l int
ensi
ties a
nd o
utpu
t sha
re
assu
mpt
ions
nec
essa
ry to
exa
min
e th
e ef
fect
s on
both
sour
ces a
nd u
ses.
How
ever
, the
cap
ital
inte
nsiti
es a
nd o
utpu
t sha
res c
an b
e sp
ecifi
ed in
a w
ay th
at is
con
sist
ent w
ith H
arbe
rger
’s (1
995)
assu
mpt
ions
: tha
t lab
or e
mpl
oyed
in th
e fir
st tw
o se
ctor
s acc
ount
s for
one
-fou
rth o
f the
dom
estic
labo
r for
ce; t
hat c
apita
l use
d in
the
first
two
sect
ors a
ccou
nts f
or o
ne-h
alf o
f all
capi
tal u
sed
in
the
corp
orat
e se
ctor
s; a
nd th
at d
omes
tic c
apita
l acc
ount
s for
thre
e-ei
ghth
s of t
he w
orld
’s c
apita
l
stoc
k. O
ther
wis
e, th
e pa
ram
eter
val
ues (
Tabl
e A
1) h
ave
been
com
plet
ed w
ith sh
are
assu
mpt
ions
Page 127
39 A
ltern
ativ
ely,
the
first
thre
e se
ctor
s can
be
assu
med
to h
ave
the
sam
e re
lativ
e ca
pita
l int
ensi
ties a
s in
Tabl
e 1,
but
the
capi
tal i
nten
sity
of s
ecto
r fiv
e m
ust b
e m
uch
low
er fo
r the
Har
berg
er (1
995)
ass
umpt
ions
to b
e sa
tisfie
d. E
ither
way
, tho
se a
ssum
ptio
ns d
o no
t app
ear t
o be
reas
onab
le fo
r the
U.S
. eco
nom
y. S
ecto
r thr
ee in
clud
es u
tiliti
es a
ndtra
nspo
rtatio
n, b
oth
of w
hich
are
mor
e ca
pita
l-int
ensi
ve th
an th
e m
anuf
actu
ring
in se
ctor
s one
and
two.
Sec
tor f
ive
incl
udes
hou
sing
and
reta
il se
rvic
es, f
or w
hich
pro
duct
ion
is m
uch
mor
e ca
pita
l int
ensi
ve th
an m
anuf
actu
ring.
40 U
nder
the
assu
mpt
ions
in T
able
A1,
the
dom
estic
con
sum
er’s
bur
den
is -9
5.8
perc
ent o
f the
reve
nue,
whi
le th
efo
reig
n co
nsum
er’s
bur
den
is -0
.04
perc
ent o
f the
reve
nue. -4
9-
mad
e by
Gra
velle
and
Sm
ette
rs (2
006)
, mos
t crit
ical
of w
hich
is th
e as
sum
ptio
n th
at la
bor
rece
ives
abo
ut 7
0 pe
rcen
t of t
he v
alue
of t
otal
out
put.
Com
pare
d to
the
base
cas
e in
this
stud
y
(Tab
le 1
), th
e ca
pita
l int
ensi
ty is
ass
umed
to b
e hi
gher
in th
e fir
st tw
o se
ctor
s (m
anuf
actu
ring)
.
Als
o, in
con
trast
to th
e ba
se c
ase,
sect
or th
ree
(util
ities
) is a
ssum
ed to
be
less
cap
ital i
nten
sive
than
the
first
two
sect
ors.39
The
Har
berg
er (1
995)
resu
lts c
an b
e re
prod
uced
for a
ver
y sm
all e
cono
my
whe
n th
e ta
x
rate
is in
finite
sim
al (T
able
A2)
. Fo
cusi
ng o
nly
on th
e so
urce
s of i
ncom
e, d
omes
tic la
bor b
ears
200
perc
ent o
f the
bur
den
of th
e co
rpor
ate
inco
me
tax.
How
ever
, the
dom
estic
con
sum
er’s
bene
fit e
qual
s 95.
8 pe
rcen
t of t
he ta
x re
venu
e, so
whe
n th
e so
urce
s and
use
s are
com
bine
d,
dom
estic
labo
r bea
rs o
nly
132.
9 pe
rcen
t of t
he b
urde
n –
still
a v
ery
larg
e sh
are.
But
the
sour
ces-
side
mea
sure
of b
urde
n ha
s litt
le m
eani
ng b
y its
elf.
As d
iscu
ssed
in a
n ea
rlier
sect
ion
of th
is
stud
y, th
e so
urce
s-si
de m
easu
re is
mea
ning
ful o
nly
if it
is c
ombi
ned
with
the
othe
r dom
estic
sour
ces-
side
bur
dens
as a
way
of m
easu
ring
chan
ges i
n th
e re
lativ
e di
strib
utio
n of
inco
me
paid
to
diff
eren
t dom
estic
fact
or o
wne
rs.
Furth
er, t
he so
urce
s-si
de b
urde
n ca
nnot
be
com
pare
d di
rect
ly
to th
e so
urce
s-si
de b
urde
ns o
f for
eign
resi
dent
s bec
ause
dom
estic
and
fore
ign
cons
umer
pric
es
chan
ge b
y di
ffer
ent a
mou
nts.40
The
rela
tive
real
inco
mes
of f
orei
gn a
nd d
omes
tic re
side
nts a
re
ther
efor
e fu
nctio
ns o
f tho
se d
iffer
ent c
hang
es in
con
sum
er p
rices
.
Whe
n th
e ef
fect
s on
sour
ces a
nd u
ses a
re c
ombi
ned,
pre
dict
ions
abo
ut b
urde
ns o
f the
corp
orat
e in
com
e ta
x ar
e no
t cha
nged
subs
tant
ially
by
the
assu
mpt
ions
in T
able
A1
(com
pare
d
-50-
with
Tab
le 1
). W
hen
the
dom
estic
eco
nom
y eq
uals
37.
5 pe
rcen
t of t
he w
orld
eco
nom
y an
d th
e
tax
rate
equ
als 6
.25
perc
ent,
the
com
bine
d m
easu
res o
f bur
den
(Tab
le A
2) u
nder
the
assu
mpt
ions
in T
able
A1
are
muc
h cl
oser
to th
e bu
rden
s pre
dict
ed u
nder
the
assu
mpt
ions
of t
he b
ase
case
in
this
stud
y (T
able
1).
Und
er th
e as
sum
ptio
ns c
onsi
sten
t with
Har
berg
er’s
(199
5) a
pplic
atio
n,
dom
estic
labo
r bea
rs 8
7.1
perc
ent o
f the
bur
den.
Dom
estic
cap
ital o
wne
rs b
ear 2
1.3
perc
ent o
f
the
tax.
Alth
ough
87.
1 pe
rcen
t and
73.
7 pe
rcen
t are
diff
eren
t, bo
th n
umbe
rs im
ply
that
dom
estic
labo
r bea
rs m
ost,
but n
ot m
ore
than
100
per
cent
, of t
he c
orpo
rate
inco
me
tax.
Har
berg
er (1
995,
200
6) a
ssum
es th
at w
orld
wid
e ca
pita
l inc
ome
is re
duce
d by
exa
ctly
100
perc
ent o
f the
reve
nue
from
the
corp
orat
e in
com
e ta
x. H
owev
er, a
lthou
gh c
apita
l ow
ners
wor
ldw
ide
bear
slig
htly
mor
e th
an 1
00 p
erce
nt o
f the
cor
pora
te ta
x bu
rden
whe
n ef
fect
s on
both
the
sour
ces a
nd u
ses o
f inc
ome
are
com
bine
d, th
at o
utco
me
does
not
occ
ur w
hen
the
mea
sure
of
burd
en is
bas
ed o
nly
on th
e so
urce
s. A
ccor
ding
to E
quat
ion
(4),
the
redu
ctio
n in
wor
ldw
ide
capi
tal i
ncom
e w
ould
not
gen
eral
ly e
qual
100
per
cent
of t
he re
venu
e w
hen
the
corp
orat
e in
com
e
tax
is im
pose
d on
ly o
n so
me
dom
estic
sect
ors.
Und
er th
e as
sum
ptio
ns (T
able
A1)
con
sist
ent
with
Har
berg
er (1
995)
, wor
ldw
ide
capi
tal i
ncom
e is
redu
ced
by 1
33.4
per
cent
(50
perc
ent +
83.
4
perc
ent)
of th
e re
venu
e w
hen
the
6.25
per
cent
cor
pora
te in
com
e ta
x is
impo
sed
in th
e la
rge
econ
omy
(Tab
le A
2).
Rem
arka
bly,
whe
n ef
fect
s on
the
sour
ces a
nd u
ses o
f inc
ome
are
com
bine
d, c
apita
l ow
ners
wor
ldw
ide
bear
104
.6 p
erce
nt o
f the
bur
den
(21.
3 pe
rcen
t + 8
3.3
perc
ent). A
ccor
ding
to E
quat
ion
(14)
, the
100
per
cent
shar
e as
sum
ptio
n m
ade
by H
arbe
rger
(199
5,
2006
) wou
ld b
e tru
e fo
r a sm
all g
ener
al ta
x on
cap
ital i
mpo
sed
on a
ll do
mes
tic se
ctor
s. U
nder
the
gene
ral r
epla
cem
ent t
ax (n
ot sh
own
in T
able
A2)
impo
sed
in th
e la
rge
econ
omy,
wor
ldw
ide
Page 128
41 G
rave
lle a
nd S
met
ters
, Tab
le 2
.
-51-
capi
tal i
ncom
e fa
lls b
y 10
1.6
perc
ent o
f the
reve
nue
rega
rdle
ss o
f whe
ther
the
sour
ces a
nd u
ses
are
com
bine
d in
the
mea
sure
of t
ax b
urde
n. T
he w
orld
wid
e ex
cess
bur
den
from
that
tax
is 1
.6
perc
ent o
f the
reve
nue.
For c
ompa
rison
, und
er th
e sh
are
assu
mpt
ions
from
Tab
le 1
, wor
ldw
ide
capi
tal i
ncom
e
falls
by
119.
3 pe
rcen
t (35
.8 p
erce
nt +
83.
5 pe
rcen
t) of
the
reve
nue
whe
n th
e 6.
25 p
erce
nt
corp
orat
e in
com
e ta
x is
impo
sed
in th
e la
rge
econ
omy
(Tab
le A
2).
Cap
ital o
wne
rs w
orld
wid
e
bear
104
.7 p
erce
nt (3
2.5
perc
ent +
72.
2 pe
rcen
t) of
the
burd
en w
hen
sour
ces a
nd u
ses a
re
com
bine
d. U
nder
the
gene
ral r
epla
cem
ent t
ax im
pose
d in
the
larg
e ec
onom
y (n
ot sh
own
in T
able
A2)
, wor
ldw
ide
capi
tal i
ncom
e fa
lls b
y 10
2.5
perc
ent o
f the
reve
nue
rega
rdle
ss o
f whe
ther
sour
ces a
nd u
ses a
re c
ombi
ned.
Gra
velle
and
Sm
ette
rs
Und
er th
e ba
sic
assu
mpt
ions
, the
num
eric
al re
sults
of t
his s
tudy
are
ver
y cl
ose
to th
e
resu
lts in
Gra
velle
and
Sm
ette
rs (2
006)
whe
n th
ose
auth
ors a
ssum
e th
at in
tern
atio
nal c
apita
l
mob
ility
is p
erfe
ct, a
nd th
at th
ere
is a
nea
rly p
erfe
ct d
eman
d su
bstit
utio
n be
twee
n th
e do
mes
tic
and
fore
ign
inte
rnat
iona
lly tr
adea
ble
good
s pro
duce
d in
the
corp
orat
e se
ctor
. In
that
cas
e, th
eir
sim
ulat
ions
pre
dict
that
dom
estic
labo
r bea
rs 7
3 pe
rcen
t of t
he b
urde
n, d
omes
tic c
apita
l ow
ners
bear
35
perc
ent,
fore
ign
capi
tal o
wne
rs b
ears
67
perc
ent,
fore
ign
labo
r bea
rs -6
9 pe
rcen
t, an
d th
e
wor
ldw
ide
exce
ss b
urde
n eq
uals
abo
ut 5
per
cent
of t
he re
venu
e.41
In
the
base
cas
e (T
able
3),
the
mod
el u
sed
in th
is st
udy
pred
icts
that
dom
estic
labo
r bea
rs 7
4 pe
rcen
t, do
mes
tic c
apita
l ow
ners
42 O
ther
ass
umpt
ions
mig
ht d
iffer
slig
htly
bet
wee
n th
e stu
dies
, but
the
effe
cts o
f tho
se a
ssum
ptio
ns a
ppea
r to
besm
all.
For
exa
mpl
e, w
hen
the
parti
al su
bstit
utio
n el
astic
ity b
etw
een
capi
tal a
nd la
bor i
s inc
reas
ed to
equ
al 1
, the
mod
el u
sed
in th
is st
udy
pred
icts
that
the
exce
ss b
urde
n w
ill e
qual
abo
ut 6
per
cent
; the
bur
den
shar
es a
re v
irtua
llyun
affe
cted
.43
The
onl
y ex
cept
ion
occu
rs if
the
dem
and
subs
titut
ion
is (n
early
) per
fect
and
the
capi
tal i
nten
sitie
s diff
er in
the
first
two
sect
ors.
In th
at e
vent
, the
mor
e ca
pita
l-int
ensi
ve d
omes
tic se
ctor
will
stop
pro
duci
ng in
resp
onse
to th
eco
rpor
ate
tax;
the
fore
ign
coun
try w
ill p
rodu
ce a
ll of
that
goo
d. T
he d
omes
tic w
age
rate
will
be
dete
rmin
ed in
the
rem
aini
ng d
omes
tic c
orpo
rate
trad
able
sect
or.
-52-
bear
33
perc
ent,
fore
ign
capi
tal o
wne
rs b
ear 7
2 pe
rcen
t, fo
reig
n la
bor b
ears
-71
perc
ent,
and
the
exce
ss b
urde
n eq
uals
abo
ut 4
per
cent
of t
he re
venu
e.
It is
not
surp
risin
g th
at th
e re
sults
of t
he tw
o st
udie
s are
so c
lose
. Ev
en th
ough
the
mod
el
appl
ied
in th
is st
udy
has a
n ad
ditio
nal s
ecto
r (se
ctor
one
), th
e pr
edic
tions
shou
ld a
ppro
xim
ate
the
Gra
velle
and
Sm
ette
rs m
odel
whe
n th
e ta
x ra
te is
smal
l and
the
auth
ors a
ssum
e th
at c
apita
l
mob
ility
is p
erfe
ct a
nd th
e in
tern
atio
nally
trad
ed c
orpo
rate
goo
ds a
re p
erfe
ct su
bstit
utes
. Fu
rther
,
both
stud
ies m
ake
the
sam
e as
sum
ptio
ns a
bout
the
size
s of s
ecto
rs a
nd th
e in
tens
ities
of f
acto
r
inpu
ts.42 Th
e tw
o st
udie
s pro
duce
ver
y di
ffer
ent r
esul
ts w
hen
ther
e is
a lo
w d
egre
e of
dem
and
subs
titut
ion
betw
een
the
fore
ign
and
dom
estic
cor
pora
te tr
adea
ble
good
s. In
that
cas
e, th
e
pred
ictio
ns o
f the
five
-sec
tor m
odel
use
d in
this
stud
y do
not
dep
end
dire
ctly
on
that
deg
ree
of
dem
and
subs
titut
abili
ty.43
In
cont
rast
, the
four
sect
or m
odel
use
d by
Gra
velle
and
Sm
ette
rs
pred
icts
that
labo
r bea
rs o
nly
21 p
erce
nt o
f the
bur
den
if ca
pita
l is p
erfe
ctly
mob
ile a
nd th
e
inte
rnat
iona
l out
put d
eman
d su
bstit
utio
n el
astic
ity e
qual
s 1.
How
the
outp
ut d
eman
d su
bstit
utio
n el
astic
ity a
ffec
ts th
e pr
edic
tions
of t
he fo
ur se
ctor
mod
el o
f Gra
velle
and
Sm
ette
rs c
an b
e re
adily
und
erst
ood
in te
rms o
f the
five
-sec
tor m
odel
use
d
in th
is st
udy.
Firs
t, su
ppos
e th
at se
ctor
one
of t
he fi
ve-s
ecto
r mod
el p
rodu
ces n
o ou
tput
, and
that
sect
or fo
ur (a
gric
ultu
re) p
rodu
ces t
he n
umer
aire
. N
ow, t
he w
age
rate
is d
eter
min
ed in
sect
or tw
o.
Unl
ike
the
base
cas
e in
this
stud
y, b
oth
the
dom
estic
sect
or tw
o ou
tput
pric
e an
d th
e do
mes
tic
Page 129
-53-
wag
e ra
te c
an c
hang
e w
hen
the
corp
orat
e co
st o
f cap
ital i
s inc
reas
ed b
y th
e ta
x. I
f the
dem
and
subs
titut
ion
elas
ticity
bet
wee
n th
e fo
reig
n an
d do
mes
tic c
orpo
rate
trad
able
goo
ds is
ver
y hi
gh,
the
dom
estic
wag
e ra
te m
ust f
all s
uffic
ient
ly to
fully
off
set a
n in
crea
se in
the
corp
orat
e co
st o
f
capi
tal,
as in
the
five-
sect
or e
cono
my.
How
ever
, if t
he d
eman
d su
bstit
utio
n el
astic
ity is
smal
l,
the
dom
estic
out
put p
rice
can
incr
ease
in se
ctor
two.
In
that
cas
e, th
e do
mes
tic w
age
rate
doe
s
not h
ave
to fa
ll as
muc
h in
ord
er to
off
set t
he in
crea
sed
corp
orat
e co
st o
f cap
ital.
Dom
estic
cons
umer
pric
es w
ill in
crea
se c
ompa
red
to e
quili
bria
whe
n th
e de
man
d su
bstit
utio
n el
astic
ity is
high
, off
set s
omew
hat b
y im
prov
ed in
tern
atio
nal t
erm
s of t
rade
for t
he d
omes
tic e
cono
my.
How
ever
, the
real
bur
den
for d
omes
tic la
bor w
ill b
e sm
alle
r tha
n w
hen
the
outp
ut d
eman
d
subs
titut
ion
elas
ticity
is h
ighe
r. F
urth
er, b
ecau
se th
at d
eman
d su
bstit
utio
n el
astic
ity d
oes n
ot
affe
ct th
e in
tern
atio
nal a
lloca
tion
of c
apita
l, do
mes
tic c
apita
l ow
ners
will
bea
r a sl
ight
ly la
rger
burd
en b
ecau
se th
ey w
ill h
ave
to p
ay h
ighe
r con
sum
er p
rices
than
whe
n th
e de
man
d su
bstit
utio
n
elas
ticity
is h
ighe
r.
Whe
n th
e de
man
d su
bstit
utio
n el
astic
ity is
low
for o
utpu
ts o
f the
cor
pora
te tr
adab
le
sect
or, e
ach
coun
try h
as so
me
pote
ntia
l mar
ket p
ower
in in
tern
atio
nal t
rade
, eve
n th
ough
com
petit
ion
is p
erfe
ct a
t the
leve
l of t
he in
divi
dual
firm
. In
par
t, th
e do
mes
tic c
orpo
rate
tax
can
act l
ike
a do
mes
tic ta
riff o
n ex
ports
from
the
corp
orat
e se
ctor
. U
nder
eith
er th
e co
rpor
ate
tax
or
such
a ta
riff,
the
dom
estic
nat
iona
l inc
ome
is in
crea
sed
at th
e ex
pens
e of
a d
ecre
ase
in th
e fo
reig
n
natio
nal i
ncom
e. D
omes
tic c
apita
l ow
ners
still
ear
n ro
ughl
y th
e sa
me
nom
inal
retu
rn u
nder
the
corp
orat
e ta
x as
whe
n th
e de
man
d su
bstit
utio
n el
astic
ity is
hig
her,
but t
hey
mus
t pay
hig
her
cons
umer
pric
es, s
o th
e do
mes
tic c
apita
l ow
ners
’ bur
den
is h
ighe
r whe
n th
e su
bstit
utio
n el
astic
ity
is lo
wer
. D
omes
tic la
bor’
s bur
den
is d
ecre
ased
by
the
rise
in d
omes
tic n
atio
nal i
ncom
e w
hen
the
44 S
ee a
lso
McD
anie
l and
Bal
istre
ri (2
003)
for a
surv
ey o
f tra
de e
last
iciti
es.
-54-
subs
titut
ion
elas
ticity
is lo
w.
Whe
n th
e ou
tput
dem
and
subs
titut
ion
and
capi
tal m
obili
ty a
re
perf
ect,
fore
ign
resi
dent
s ove
rall
do n
ot b
ear a
ny b
urde
n of
the
tax.
How
ever
, whe
n th
e ou
tput
dem
and
subs
titut
ion
elas
ticity
is o
nly
1, th
e G
rave
lle a
nd S
met
ters
mod
el p
redi
cts t
hat t
he ta
riff-
like
effe
ct a
llow
s the
dom
estic
eco
nom
y to
exp
ort a
bout
hal
f of t
he to
tal b
urde
n of
its c
orpo
rate
inco
me
tax
to fo
reig
ners
.
The
Gra
velle
and
Sm
ette
rs m
odel
, in
effe
ct, a
llow
s the
aut
hors
to m
easu
re h
ow th
e
corp
orat
e ta
x m
ight
aff
ect t
he d
istri
butio
n of
bur
dens
thro
ugh
its e
ffec
ts o
n in
tern
atio
nal t
rade
whe
n th
e do
mes
tic c
ount
ry h
as so
me
wor
ld m
onop
oly
pow
er.
The
anal
ysis
in th
is st
udy
indi
cate
s tha
t the
trad
e ef
fect
s and
bur
dens
will
be
diff
eren
t whe
n th
ere
are
addi
tiona
l cor
pora
te
sect
ors t
hat p
rodu
ce g
oods
with
hig
her r
ates
of o
utpu
t dem
and
subs
titut
abili
ty b
etw
een
the
dom
estic
and
fore
ign
varie
ties.
A re
cent
stud
y by
Erk
el-R
ouss
e an
d M
irza
(200
2) e
stim
ated
impo
rt pr
ice
elas
ticiti
es b
ased
on
bila
tera
l tra
de e
quat
ions
. Th
ey e
stim
ate
larg
er e
last
iciti
es fo
r
certa
in p
rodu
cts s
uch
as ru
bber
(-6.
5) a
nd n
on-m
etal
lic p
rodu
cts (
-6.6
) tha
n fo
r oth
er p
rodu
cts
such
as b
ever
ages
(-1.
7) a
nd fo
od p
rodu
cts (
-1.0
). F
urth
er, e
ven
thei
r ave
rage
ela
stic
ity e
stim
ate
is fa
irly
larg
e: T
hey
estim
ate
an a
vera
ge e
last
icity
of -
3.8
for a
ll in
dust
ries.
Rea
sona
ble
long
-run
elas
ticiti
es a
re li
kely
to b
e ev
en la
rger
.44
Page 130
Tab
le 1
: In
itial
Ass
umpt
ions
Shar
e of
Val
ue A
dded
in S
ecto
r
Shar
e of
Labo
rC
apita
lLa
ndO
utpu
tC
orpo
rate
Sec
tors
Se
ctor
s 1 a
nd 2
: Tr
adea
ble
82%
18%
…28
%
Sect
or 3
: N
ontra
deab
le76
%24
%…
45%
Non
-Cor
pora
te S
ecto
rs
Sect
or 4
: Tr
adea
ble,
agr
icul
ture
49%
17%
34%
3%
Sect
or 5
: N
ontra
deab
le47
%53
% …
24%
Tota
l70
%29
%1%
100%
Dom
estic
eco
nom
y's s
hare
of w
orld
out
put
30%
Dom
estic
ow
ners
hip
shar
e of
wor
ld c
apita
l30
%Pa
rtial
ela
stic
ity o
f sub
stitu
tion,
cap
ital a
nd la
bor
0.6
Sour
ce:
Bas
ed o
n G
rave
lle a
nd S
met
ters
(200
6).
-55-
Tab
le 2
: E
cono
mic
Cha
nges
und
er C
orpo
rate
and
Gen
eral
Tax
es
Cor
pora
te T
ax
Gen
eral
Tax
Dom
estic
For
eign
Dom
estic
For
eign
Tax
rat
e (t
ax-e
xclu
sive
)
Cor
pora
te se
ctor
s6.
25%
0.0%
3.35
%0.
0%
Non
corp
orat
e se
ctor
s0.
0%0.
0%3.
35%
0.0%
Cap
ital s
tock
cha
nges
C
orpo
rate
sect
ors
-3.7
%0.
85%
-1.7
%0.
73%
N
onco
rpor
ate
sect
ors
0.0
36%
0.85
%-1
.7%
0.73
%
Tota
l (w
eigh
ted
by c
apita
l sha
res)
-2.0
%0.
85%
-1.7
%0.
73%
Inpu
t pri
ce c
hang
es
Cos
t of c
apita
l
C
orpo
rate
sect
ors
5.0%
-1.2
%2.
3%-0
.99%
Non
corp
orat
e se
ctor
s-1
.2%
-1.2
%2.
3%-0
.99%
W
age
rate
-1.1
%0.
25%
-0.5
1%0.
22%
La
nd re
nt2.
2%0.
21%
-0.4
3%0.
18%
Con
sum
er p
rice
cha
nges
C
orpo
rate
sect
ors
Sect
or 1
: Tr
adea
ble,
num
erai
re0.
0%0.
0%0.
0%0.
0%
Se
ctor
2:
Trad
eabl
e, u
niqu
e0.
0%0.
0%0.
0%0.
0%
Se
ctor
3:
Non
trade
able
0.37
%-0
.085
%0.
17%
-0.0
7%
Non
-cor
pora
te se
ctor
s
Se
ctor
4:
Trad
eabl
e, a
gric
ultu
re0.
0%0.
0%0.
0%0.
0%
Se
ctor
5:
Non
trade
able
-1.1
%-0
.5%
0.99
%-0
.42%
To
tal (
Lasp
eyre
s)-0
.11%
-0.1
6%0.
31%
-0.1
3%
Priv
ate
inco
me
chan
ges (
real
)
Labo
r-0
.99%
0.41
%-0
.82%
0.35
%
Cap
ital
-1.1
%-1
.0%
-1.3
%-0
.86%
La
nd2.
3%0.
37%
-0.7
4%0.
32%
To
tal (
wei
ghte
d by
inco
me
shar
es)
-0.9
78%
0.00
%-0
.963
%0.
00%
Tax
reve
nue
(per
cent
age
of o
utpu
t)0.
944%
0.00
%0.
944%
0.00
%N
atio
nal i
ncom
e (p
erce
ntag
e of
reve
nue)
-3.7
0%0.
00%
-2.0
5%0.
00%
Wor
ldw
ide
inco
me
(per
cent
age
of re
venu
e)-3
.70%
-2.0
5%
-56-
Page 131
Tab
le 3
: B
urde
ns o
f the
Cor
pora
te In
com
e T
ax
Labo
rC
apita
lLa
ndTo
tal
Dom
estic
Tax
es o
n C
apita
l Inc
ome
at P
rodu
cer
Lev
el;
Bur
dens
as S
hare
s of R
even
ueC
orpo
rate
Tax
Dom
estic
73.7
%32
.5%
-2.5
%10
3.7%
For
eign
-71.
3% 7
2.2%
-0.9
%
0.0
% W
orld
wid
e2.
4%10
4.7%
-3.4
%10
3.7%
Gen
eral
Tax
Dom
estic
61.0
%40
.3%
0.8%
102.
0% F
orei
gn-6
1.0%
61.
8%-0
.8%
0
.0%
Wor
ldw
ide
0.0%
102.
0%0.
0%10
2.0%
Rep
lace
men
t Tax
es;
Diff
eren
tial B
urde
ns a
s Sha
res o
f Rev
enue
Gen
eral
Tax
Dom
estic
-12.
7%7.
8%3.
3%-1
.7%
For
eign
10.3
%-1
0.4%
0.1%
0.0
% W
orld
wid
e-2
.4%
-2.7
%3.
4%-1
.7%
Dom
estic
Lab
or In
com
e D
omes
tic26
.3%
-32.
5%2.
5%-3
.7%
For
eign
71.3
% -
72.2
%0.
9% 0
.0%
Wor
ldw
ide
97.6
%-1
04.7
%3.
4%-3
.7%
Wor
dwid
e C
apita
l Inc
ome
of D
omes
tic R
esid
ents
Dom
estic
-73.
7%67
.5%
2.5%
-3.7
% F
orei
gn71
.3%
-72.
2%0.
9% 0
.0%
Wor
ldw
ide
-2.4
%-4
.7%
3.4%
-3.7
%
Dom
estic
Per
sona
l Inc
ome
or C
onsu
mpt
ion
Dom
estic
-3.8
%-3
.4%
3.5%
-3.7
% F
orei
gn71
.3%
-72.
2%0.
9% 0
.0%
Wor
ldw
ide
67.5
%-7
5.6%
4.4%
-3.7
%
-57-
Tab
le 4
: B
urde
ns o
f the
Cor
pora
te In
com
e T
ax a
t an
Infin
itesi
mal
Tax
Rat
e
Labo
rC
apita
lLa
ndTo
tal
Dom
estic
Tax
es o
n C
apita
l Inc
ome
at P
rodu
cer
Lev
el;
Bur
dens
as S
hare
s of R
even
ueC
orpo
rate
Tax
Dom
estic
71.0
%31
.3%
-2.4
%10
0.0%
For
eign
-68.
7% 6
9.6%
-0.9
%
0.0
% W
orld
wid
e2.
3%10
1.0%
-3.3
%10
0.0%
Gen
eral
Tax
Dom
estic
59.7
%39
.5%
0.8%
100.
0% F
orei
gn-5
9.7%
60.
5%-0
.8%
0
.0%
Wor
ldw
ide
0.0%
100.
0%0.
0%10
0.0%
Rep
lace
men
t Tax
es;
Diff
eren
tial B
urde
ns a
s Sha
res o
f Rev
enue
Gen
eral
Tax
Dom
estic
-11.
3%8.
1%3.
2%0.
0% F
orei
gn 9
.0%
-9.1
%0.
1%0.
0% W
orld
wid
e-2
.3%
-1.0
%3.
3%0.
0%
Dom
estic
Lab
or In
com
e D
omes
tic29
.0%
-31.
3%2.
4%0.
0% F
orei
gn68
.7%
-69
.6%
0.9%
0.0%
Wor
ldw
ide
97.7
%-1
01.0
%3.
3%0.
0%
Wor
ldw
ide
Cap
ital I
ncom
e of
Dom
estic
Res
iden
ts D
omes
tic-7
1.0%
68.7
%2.
4%0.
0% F
orei
gn68
.7%
-69.
6%0.
9%0.
0% W
orld
wid
e-2
.3%
-1.0
%3.
3%0.
0%
Dom
estic
Per
sona
l Inc
ome
or C
onsu
mpt
ion
Dom
estic
-1.1
%-2
.3%
3.4%
0.0%
For
eign
68.7
%-6
9.6%
0.9%
0.0%
Wor
ldw
ide
67.6
%-7
1.9%
4.3%
0.0%
-58-
Page 132
Tab
le 5
: In
tern
atio
nal S
pillo
ver
Eff
ects
of a
Dom
estic
Cor
pora
te In
com
e T
a x
Bur
den
as a
Sha
re o
f Rev
enue
Labo
rC
apita
lLa
ndTo
tal
Bas
e C
ase
(fro
m T
able
3)
Dom
estic
73.7
%32
.5%
-2.5
%10
3.7%
Fore
ign
-71.
3% 7
2.2%
-0.9
%
0.0
%W
orld
wid
e2.
4%10
4.7%
-3.4
%10
3.7%
Dom
estic
Cou
ntry
is a
Net
Inte
rnat
iona
l Len
der
Dom
estic
73.7
%37
.9%
-2.5
%10
9.1%
Fore
ign
-71.
3% 6
7.0%
-0.9
%
-5.2
%W
orld
wid
e2.
4%10
5.0%
-3.4
%10
4.0%
Dom
estic
Cou
ntry
is a
Net
Inte
rnat
iona
l Bor
row
er
Dom
estic
73.7
%27
.1%
-2.5
%98
.3%
Fore
ign
-71.
3% 7
7.4%
-0.9
%
5.2
%W
orld
wid
e2.
4%10
4.4%
-3.4
%10
3.4%
Sect
or 2
is M
ore
Cap
ital-I
nten
sive
than
Sec
tor
1
Dom
estic
59.0
%37
.5%
-1.6
%94
.9%
Fore
ign
-57.
0% 6
7.0%
-1.3
%
8.7
%W
orld
wid
e2.
0%10
4.5%
-2.9
%10
3.7%
Sect
or 2
is L
ess C
apita
l-Int
ensi
ve th
an S
ecto
r 1
Dom
estic
90.6
%26
.7%
-3.5
%11
3.9%
Fore
ign
-87.
8% 7
8.2%
-0.5
% -1
0.1%
Wor
ldw
ide
2.8%
104.
9%-4
.0%
103.
7%
-59-
Tab
le 6
: E
cono
mic
Cha
nges
und
er a
Cor
pora
te In
com
e T
ax W
hen
Cap
ital I
nten
sitie
s Diff
er
Cap
ital I
nten
sity
in S
ecto
r Tw
o C
ompa
red
with
Sec
tor O
neSa
me
Inte
nsity
H
ighe
r Int
ensi
ty
Low
er In
tens
ityD
omes
ticFo
reig
nD
omes
ticFo
reig
n D
omes
ticFo
reig
n
Tax
rat
e (t
ax-e
xclu
sive
)
Cor
pora
te se
ctor
s6.
25%
0.00
%6.
25%
0.00
%6.
25%
0.00
%
Non
-cor
pora
te se
ctor
s0.
00%
0.00
%0.
00%
0.00
%0.
00%
0.00
%
Cap
ital s
tock
cha
nges
C
orpo
rate
sect
ors
-3.6
7%0.
85%
-3.4
6%0.
76%
-3.9
2%0.
96%
N
onco
rpor
ate
sect
ors
0.04
%0.
85%
0.25
%0.
76%
-0.2
1%0.
96%
To
tal (
wei
ghte
d by
cap
ital s
hare
s)-1
.98%
0.85
%-1
.77%
0.76
%-2
.23%
0.96
%
Inpu
t pri
ce c
hang
es
Cos
t of c
apita
l
C
orpo
rate
sect
ors
5.02
%-1
.16%
5.07
%-1
.11%
4.96
%-1
.21%
Non
corp
orat
e se
ctor
s-1
.16%
-1.1
6%-1
.11%
-1.1
1%-1
.21%
-1.2
1%
Wag
e ra
te-1
.10%
0.25
%-0
.69%
0.15
%-1
.57%
0.38
%
Land
rent
2.17
%0.
21%
1.55
%0.
34%
2.86
%0.
05%
Con
sum
er p
rice
cha
nges
C
orpo
rate
sect
ors
Sect
or 1
: Tr
adea
ble,
num
erai
re0.
00%
0.00
%0.
00%
0.00
%0.
00%
0.00
%
Se
ctor
2:
Trad
eabl
e, u
niqu
e0.
00%
0.00
%0.
46%
-0.1
0%-0
.52%
0.13
%
Se
ctor
3:
Non
trade
able
0.37
%-0
.08%
0.69
%-0
.15%
0.00
%0.
00%
N
on-c
orpo
rate
sect
ors
Sect
or 4
: Tr
adea
ble,
agr
icul
ture
0.00
%0.
00%
0.00
%0.
00%
0.00
%0.
00%
Sect
or 5
: N
ontra
deab
le-1
.13%
-0.5
0%-0
.91%
-0.5
2%-1
.38%
-0.4
6%
Tota
l (La
spey
res)
-0.1
1%-0
.16%
0.11
%-0
.18%
-0.3
5%-0
.13%
Priv
ate
inco
me
chan
ges (
real
)
Labo
r-0
.99%
0.41
%-0
.80%
0.33
%-1
.22%
0.51
%
Cap
ital
-1.0
5%-1
.00%
-1.2
2%-0
.93%
-0.8
7%-1
.09%
La
nd2.
27%
0.37
%1.
45%
0.52
%3.
21%
0.18
%
Tota
l (w
eigh
ted
by in
com
e sh
ares
)-0
.98%
0.00
%-0
.90%
-0.0
4%-1
.07%
0.04
%
Tax
reve
nue
(per
cent
age
of o
utpu
t)0.
94%
0.00
%0.
94%
0.00
%0.
94%
0.00
%N
atio
nal i
ncom
e (p
erce
ntag
e of
reve
nue)
-3.7
0%0.
00%
5.06
%-8
.75%
-13.
85%
10.1
3%W
orld
wid
e in
com
e (p
erce
ntag
e of
reve
nue)
-3.7
0%-3
.69%
-3.7
2%
-60-
Page 133
Tab
le 7
: C
orpo
rate
Tax
Bur
den
Shar
es a
nd R
elat
ive
Eco
nom
y Si
ze,
Bur
dens
Mea
sure
d on
an
Agg
rega
te B
asis
a
Shar
e of
Bur
den
as a
Sha
re o
f Rev
enue
Wor
ld O
utpu
tLa
bor
Cap
ital
Land
Tota
l
Dom
estic
1%10
4.3%
2.6%
-2.1
%10
4.8%
Fore
ign
99%
-101
.9%
103.
2%-1
.3%
0.0%
Dom
estic
5%10
0.0%
6.8%
-2.1
%10
4.7%
Fore
ign
95%
-97.
6%98
.9%
-1.3
%0.
0%
Dom
estic
10%
94.7
%12
.0%
-2.2
%10
4.5%
Fore
ign
90%
-92.
3%93
.5%
-1.2
%0.
0%
Dom
estic
20%
84.1
%22
.3%
-2.3
%10
4.1%
Fore
ign
80%
-81.
7%82
.8%
-1.1
%0.
0%
Dom
estic
30%
73.7
%32
.5%
-2.5
%10
3.7%
Fore
ign
70%
-71.
3%72
.2%
-0.9
%0.
0%
Dom
estic
50%
52.9
%52
.7%
-2.7
%10
3.0%
Fore
ign
50%
-50.
5%51
.2%
-0.7
%0.
0%
Dom
estic
70%
32.5
%72
.7%
-3.0
%10
2.2%
Fore
ign
30%
-30.
1%30
.5%
-0.4
%0.
0%
Dom
estic
90%
12.3
%92
.4%
-3.2
%10
1.5%
Fore
ign
10%
-10.
0%10
.1%
-0.1
%0.
0%
Dom
estic
~100
%2.
3%10
2.2%
-3.3
%10
1.2%
Fore
ign
~0%
0.0%
0.0%
0.0%
0.0%
a Tot
al b
urde
ns d
ivid
ed b
y to
tal d
omes
tic re
venu
e
-61-
Tab
le 8
: C
orpo
rate
Tax
Bur
den
Shar
es a
nd R
elat
ive
Eco
nom
y Si
ze,
Bur
dens
Mea
sure
d on
a P
er C
apita
Bas
isa
Shar
e of
Per C
apita
Bur
den
Shar
esW
orld
Out
put
Labo
rC
apita
lLa
ndTo
tal
Dom
estic
1%10
4.3%
2.6%
-2.1
%10
4.8%
Fore
ign
99%
-1.0
%1.
0%0.
0%0.
0%
Dom
estic
5%10
0.0%
6.8%
-2.1
%10
4.7%
Fore
ign
95%
-5.1
%5.
2%-0
.1%
0.0%
Dom
estic
10%
94.7
%12
.0%
-2.2
%10
4.5%
Fore
ign
90%
-10.
3%10
.4%
-0.1
%0.
0%
Dom
estic
20%
84.1
%22
.3%
-2.3
%10
4.1%
Fore
ign
80%
-20.
4%20
.7%
-0.3
%0.
0%
Dom
estic
30%
73.7
%32
.5%
-2.5
%10
3.7%
Fore
ign
70%
-30.
5%30
.9%
-0.4
%0.
0%
Dom
estic
50%
52.9
%52
.7%
-2.7
%10
3.0%
Fore
ign
50%
-50.
5%51
.2%
-0.7
%0.
0%
Dom
estic
70%
32.5
%72
.7%
-3.0
%10
2.2%
Fore
ign
30%
-70.
3%71
.2%
-0.9
%0.
0%
Dom
estic
90%
12.3
%92
.4%
-3.2
%10
1.5%
Fore
ign
10%
-89.
7%90
.9%
-1.2
%0.
0%
Dom
estic
~100
%2.
3%10
2.2%
-3.3
%10
1.2%
Fore
ign
~0%
0.0%
0.0%
0.0%
0.0%
a Loc
al p
er c
apita
bur
dens
div
ided
by
dom
estic
per
cap
ita re
venu
e.
-62-
Page 134
Tab
le A
1: S
hare
s Con
sist
ent w
ith H
arbe
rger
(199
5)
Shar
e of
Val
ue A
dded
in S
ecto
r
Shar
e of
Labo
rC
apita
lLa
ndO
utpu
tC
orpo
rate
sect
ors
Se
ctor
s 1 a
nd 2
: Tr
adea
ble
71%
29%
…25
%
Sect
or 3
: N
ontra
deab
le82
%18
%…
40%
Non
-cor
pora
te se
ctor
s
Sect
or 4
: Tr
adea
ble,
agr
icul
ture
49%
17%
34%
3%
Sect
or 5
: N
ontra
deab
le57
%43
% …
32%
Tota
l70
%29
%1%
100%
Dom
estic
eco
nom
y's s
hare
of w
orld
out
put
37.5
%D
omes
tic o
wne
rshi
p sh
are
of w
orld
cap
ital
37.5
%Pa
rtial
ela
stic
ity o
f sub
stitu
tion,
cap
ital a
nd la
bor
0.6
Sour
ces:
Bas
ed o
n H
arbe
rger
(199
5) a
nd G
rave
lle a
nd S
met
ters
(200
6).
-63-
Tab
le A
2: R
econ
cilia
tion
with
Har
berg
er (1
995)
Sour
ces
Bur
den
as a
Sha
re o
f Rev
enue
and
Use
sLa
bor
Cap
ital
Land
Con
sum
ers
Tota
l
Smal
l Eco
nom
y, In
finite
sim
al T
ax R
ate,
Sha
res f
rom
Tab
le A
1
Dom
estic
sepa
rate
200.
0%0.
0%-4
.2%
-95.
8%10
0.0%
Fore
ign
sepa
rate
-129
.3%
129.
3%0.
4%-0
.4%
0.0%
Dom
estic
com
bine
d13
2.9%
-27.
8%-5
.1%
…10
0.0%
Fore
ign
com
bine
d-1
29.6
%12
9.2%
0.4%
…0.
0%
Lar
ge E
cono
my,
6.2
5 Pe
rcen
t Tax
Rat
e, S
hare
s fro
m T
able
A1
Dom
estic
sepa
rate
156.
4%50
.0%
-4.1
%-9
9.1%
103.
3%Fo
reig
nse
para
te-8
3.4%
83.4
%0.
3%-0
.3%
0.0%
Dom
estic
com
bine
d87
.1%
21.3
%-5
.1%
…10
3.3%
Fore
ign
com
bine
d-8
3.6%
83.3
%0.
3%…
0.0%
Lar
ge E
cono
my,
6.2
5 Pe
rcen
t Tax
Rat
e, S
hare
s fro
m T
able
1
Dom
estic
sepa
rate
81.6
%35
.8%
-2.3
%-1
1.3%
103.
7%Fo
reig
nse
para
te-4
4.1%
83.5
%-0
.5%
-38.
9%0.
0%
Dom
estic
com
bine
d73
.7%
32.5
%-2
.5%
…10
3.7%
Fore
ign
com
bine
d-7
1.3%
72.2
%-0
.9%
…0.
0%
-64-
Page 135
-65-
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eren
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rbac
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(The
Fel
dste
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orio
ka P
uzzl
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Not
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urde
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Page 137
Alan J. Auerbach
Alan J. Auerbach is the Robert D. Burch Professor of Economics and Law, Director of
the Burch Center for Tax Policy and Public Finance, and former Chair of the Economics
Department at the University of California, Berkeley. He is also a Research Associate
of the National Bureau of Economic Research and previously taught at Harvard and the
University of Pennsylvania, where he also served as Economics Department Chair.
Professor Auerbach was Deputy Chief of Staff of the U.S. Joint Committee on Taxation
in 1992 and has been a consultant to several government agencies and institutions in
the United States and abroad. A former Vice President of the American Economic
Association, he was Editor of that association’s Journal of Economic Perspectives and
is now Editor of its new American Economic Journal: Economic Policy. Professor
Auerbach is a Fellow of the Econometric Society and of the American Academy of Arts
and Sciences.
Page 138
Robert Carroll Deputy Assistant Secretary for Tax Analysis
Robert Carroll is the Deputy Assistant Secretary (Tax Analysis) in the Office of Tax Policy at the Department of the Treasury. He joined the Treasury Department in December of 2003. At Treasury, Dr. Carroll provides economic advice and analysis for the Office of Tax Policy with regard to all aspects of the economics of Federal taxation. He is responsible for the development, analysis and implementation of tax policies and programs. Dr. Carroll was most recently a Visiting Scholar in the Tax Analysis Division of the Congressional Budget Office, where he provided analyses of investment incentives, tax reform, income dynamics, and the distributional effects of taxes. From July 2002 to June 2003 he served as a Senior Economist (Public Finance) with the President’s Council of Economic Advisers. He was responsible for providing economic analysis and briefings on a variety of public finance issues, including the President’s Jobs & Growth Act, tax reform, tax simplification, international taxation, and retirement security. Prior to the CEA, he was a Financial Economist with the Treasury Department’s Office of Tax Analysis, Revenue Estimating Division from 1996 to 2002, a position he also held from 1990 to 1995. He was responsible for preparing economic analyses of Administration and Congressional proposals. He worked for Ernst & Young, LLP, from 1995 to 1996, as Manager, Policy and Regulatory Economics. He holds a Ph.D. and a Masters in Economics from Syracuse University and a B.S. in Economics from State University of New York.
Page 139
Mihir A. Desai
Mihir A. Desai is an Assistant Professor of Business Administration in the Finance and Entrepreneurial Management areas of Harvard Business School. Professor Desai's research focuses on international corporate and public finance. Within international corporate finance, he has investigated the determinants of ownership shares and capital structure choice for multinational affiliates, the advantages afforded by the internal capital markets of multinationals, the determinants of dividend remittance policy for multinationals, and the interaction between domestic and international investment decisions by firms. Within international public finance, his research has emphasized the effects of taxation on the export, financing, organizational form, and investment decisions of firms facing multiple tax regimes. Additionally, his work has also addressed the dynamics of international tax competition, the interactions of inflation and taxation in an open economy and the policy choices available to developing countries facing the loss of talent. He is a Faculty Research Fellow in the National Bureau of Economic Research's Public Economics Program, and his research has been cited in The Economist, BusinessWeek, and The New York Times.
Currently, Professor Desai teaches First-Year Finance and has participated in several executive education programs at HBS. Additionally, he co-teaches Public Economics (EC 1410) at Harvard College. He received the Student Association Award for teaching excellence from the HBS Class of 2001. He received his Ph.D. in political economy with a concentration in corporate finance and public finance from Harvard University; his MBA as a Baker Scholar from Harvard Business School; and a bachelors degree in history and economics with honors and distinction from Brown University. In 1994, he was a Fulbright Scholar to India. His professional experiences include working at CS First Boston, McKinsey & Co., and advising a number of startup firms.
Page 140
C. Fritz Foley Associate Professor of Business Administration
Fritz Foley is an Assistant Professor in the Finance area at Harvard Business School, where he currently teaches the required course in the first-year MBA program. He is also a Faculty Research Fellow in the National Bureau of Economic Research’s International Trade and Investment Program.
Professor Foley’s research focuses on international corporate finance with a particular emphasis on the activities of multinational firms. He has investigated the use of international joint ventures, the determinants of multinational affiliate capital structure and dividend repatriations, the advantages associated with internal capital and labor markets, the impact of capital controls on multinationals, and the effects of stock market valuations on foreign direct investment. His recent work on how intellectual property rights influence international technological transfers has been funded by grants from the National Science Foundation and the World Bank. His academic articles have appeared in several journals including The Journal of Finance, the Journal of Financial Economics, the Journal of Public Economics, the National Tax Journal, the Review of Financial Studies, and the Quarterly Journal of Economics.
Prior to joining HBS, Professor Foley taught at the University of Michigan Business School. He received a Ph. D. in Business Economics from Harvard University and a B.A. in Ethics, Politics, and Economics from Yale University. Professor Foley has also worked as a strategy consultant at Monitor Company and conducted research on multinational firms in the apparel export sector as a Fulbright Scholar in Sri Lanka.
Phone: 617 495-6375 Fax: 617 495-7659
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William Gale
William Gale is vice president and director of the Economic Studies Program at the Brookings Institution and the Arjay and Frances Miller Chair in Federal Economic Policy. He conducts research on a variety of economic issues, focusing particularly on tax policy, fiscal policy, pensions and saving behavior. He is co-director of the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. He is also director of the Retirement Security Project, an initiative supported by the Pew Charitable Trusts, in partnership with Georgetown University’s Public Policy Institute and Brookings. Gale attended Duke University and the London School of Economics and received his Ph.D. from Stanford University in 1987. Prior to joining Brookings in 1992, he was an assistant professor in the Department of Economics at the University of California, Los Angeles, and a senior staff economist for the Council of Economic Advisers under President George H.W. Bush. He is the co-author or co-editor of several books, including Taxing the Future: Fiscal Policy in the Bush Administration (Brookings, forthcoming); Aging Gracefully: Ideas to Improve Retirement Security in America (Century Foundation, 2006); The Evolving Pension System: Trends, Effects, and Proposals for Reform (Brookings, 2005); Private Pensions and Public Policy (Brookings, 2004); Rethinking Estate and Gift Taxation (Brookings, 2001), and Economic Effects of Fundamental Tax Reform (Brookings, 1996).
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Michael J. Graetz Michael J. Graetz is the Justus S. Hotchkiss Professor of Law at Yale University. Before becoming a professor at Yale in 1983, he was a professor of law at the University of Virginia and the University of Southern California law schools and Professor of Law and Social Sciences at the California Institute of Technology. His publications on the subject of Federal taxation include a leading law school text and more than 50 articles on a wide range of tax, health policy, social insurance, and tax compliance issues in books and scholarly journals. His most recent books, True Security: Rethinking Social Insurance and The U.S. Income Tax: What It Is, How It Got That Way and Where We Go From Here, were published in 1999 by Yale University Press and W. W. Norton & Co, respectively. He is the author of The “Original Intent” of U.S. International Taxation, 46 Duke L.J. 1021 (1997) and Taxing International Income: Inadequate Principles, Outdated Concepts and Unsatisfactory Policies (forthcoming Tax L.Rev. 2001). During January-June 1992, Michael Graetz served as Assistant to the Secretary and Special Counsel at the Treasury Department. In 1990 and 1991, he served as Treasury Deputy Assistant Secretary for Tax Policy. Professor Graetz has been a John Simon Guggenheim Memorial Fellow and he received an award from Esquire Magazine for courses and work in connection with provision of shelter for the homeless. He served on the Commissioner's Advisory Group of the Internal Revenue Service. He served previously in the Treasury Department in the Office of Tax Legislative Counsel during 1969-1972. Professor Graetz is a graduate of Emory University (B.B.A. 1966) and the University of Virginia Law School (J.D. 1969). A native of Atlanta, Georgia, Michael Graetz is married to Brett Dignam and has five children.
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Kevin A. Hassett
Kevin A. Hassett is the director of economic policy studies and a resident scholar at AEI. He is also a weekly columnist for Bloomberg. Before joining AEI, Mr. Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at the Graduate School of Business of Columbia University. He was an economic adviser to the George W. Bush campaign in the 2004 presidential election, and was the chief economic adviser to Senator John McCain (R-Ariz.) during the 2000 primaries. He has also served as a policy consultant to the U.S. Department of the Treasury during both the former Bush and Clinton administrations. Mr. Hassett is a member of the Joint Committee on Taxation’s Dynamic Scoring Advisory Panel. He is the author, coauthor or editor of six books on economics and economic policy, including the AEI book on tax reform, Toward Fundamental Tax Reform. He has published scholarly articles in the American Economic Review, the Economic Journal, the Quarterly Journal of Economics, the Review of Economics and Statistics, the Journal of Public Economics, and many other professional journals. His popular writings have been published in the Wall Street Journal, the Atlantic Monthly, USA Today, the Washington Post, and numerous other outlets. His economic commentaries are regularly aired on radio and television, including recent appearances on the Today Show, CBS’s Morning Show, Newshour with Jim Lehrer, Hardball, Moneyline, and Power Lunch.
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James R. Hines Jr.
James Hines teaches at the University of Michigan, where he is Richard A. Musgrave Collegiate Professor of Economics in the department of economics and Professor of Law in the law school. He also serves as Research Director of the business school’s Office of Tax Policy Research. His research concerns various aspects of taxation. He holds a B.A. and M.A. from Yale University and a Ph.D. from Harvard, all in economics. He taught at Princeton and Harvard prior to moving to Michigan in 1997, and has held visiting appointments at Columbia, the London School of Economics, and Harvard Law School. He is a research associate of the National Bureau of Economic Research, research director of the International Tax Policy Forum, co-editor of the American Economic Association’s Journal of Economic Perspectives, and once, long ago, was an economist in the United States Department of Commerce.
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R. Glenn Hubbard
Glenn Hubbard was named dean of Columbia Business School on July 1, 2004. A Columbia faculty member since 1988, he is also the Russell L. Carson Professor of Finance and Economics. Professor Hubbard received his BA and BS degrees summa cum laude from the University of Central Florida, where he received the National Society of Professional Engineers Award. He also holds AM and PhD degrees in economics from Harvard University. After graduating from Harvard, Professor Hubbard began his teaching career at Northwestern University, moving to Columbia in 1988. He has been a visiting professor at Harvard’s Kennedy School of Government and Harvard Business School as well as the University of Chicago. Professor Hubbard also held the John M. Olin Fellowship at the National Bureau of Economic Research.
In addition to writing more than 90 scholarly articles in economics and finance, Professor Hubbard is the author of a leading textbook on money and financial markets. His commentaries have appeared in Business Week, the Wall Street Journal, the New York Times, the Financial Times, the Washington Post, Nikkei and the Daily Yomiuri, as well as on television (on PBS’s Nightly Business Report) and radio (on NPR’s Marketplace).
In government, Professor Hubbard served as deputy assistant secretary of the U.S. Treasury Department for Tax Policy from 1991 to –1993. From February 2001 until March 2003, he was chairman of the U.S. Council of Economic Advisers under President George W. Bush. While serving as CEA chairman, he also chaired the Economic Policy Committee of the OECD. In the corporate sector, he is currently a director of ADP, Dex Media, KKR Financial Corporation, and Ripplewood Holdings.
Professor Hubbard is married to Constance Pond Hubbard. They live in Manhattan with their two sons.
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William Randolph William Randolph is an economist and Senior Analyst for the Tax Analysis Division of the Congressional Budget Office. He served previously as the Director for International Taxation in the U.S. Treasury’s Office of Tax Analysis. Dr. Randolph has worked on a wide variety of domestic and international tax policy issues for the U.S. government and has published numerous journal articles in public finance and econometrics.
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John M. Samuels
John Samuels is GE’s Vice President and Senior Counsel for Tax Policy and Planning. He is responsible for GE’s worldwide Tax Organization and for the Company’s global tax planning and tax compliance operations. He is a member of GE’s Corporate Executive Council, the GE Capital Corporation Board of Directors and the GE Pension Board. Prior to joining GE in 1988, he was a partner in the law firm of Dewey, Ballantine in Washington, D.C. and New York City. From 1976 to 1981 Mr. Samuels served as the Deputy Tax Legislative Counsel and Tax Legislative Counsel of the U.S. Department of Treasury in Washington, D.C. Mr. Samuels is the Chairman of the International Tax Policy Forum, a Fellow of the American College of Tax Counsel, a Trustee of the American Tax Policy Institute and a member of The Business Roundtable Tax Coordinating Committee. He is a member of the University of Chicago Law School Visiting Committee, was an adjunct professor of taxation of NYU Law School (1975 to 1986), and a Visiting Lecturer at Yale Law School (1997-2006). Mr. Samuels is a graduate of Vanderbilt University (1966) and the University of Chicago Law School (1969), and received an LLM in taxation (1976) from NYU Law School.
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Lawrence H. Summers
Lawrence H. Summers is Charles W. Eliot University Professor at Harvard University. He served as the 27th president of Harvard University from July 2001 until June 2006. From 1999 to 2001 he served as the U.S. Secretary of the Treasury following his earlier service as Deputy and Under Secretary of the Treasury and as Chief Economist of the World Bank. Prior to his service in Washington, Summers was a professor of economics at Harvard and MIT. His research contributions were recognized when he received the John Bates Clark Medal, given every two years to the outstanding American economist under the age of 40, and when he was the first social scientist to receive the National Science Foundation's Alan T. Waterman Award for outstanding scientific achievement. He is a member of the National Academy of Science. He received his BS from MIT and his PhD in economics from Harvard. Among his other activities, Lawrence Summers writes a monthly column for the Financial Times, coedits the Brookings Papers on Economic Activity, and serves as a managing director of D. E. Shaw, a major alternative investment firm. He also serves on a number of not-for-profit and for-profit boards.
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Eric Toder Eric Toder is a Senior Fellow at the Urban Institute and Urban-Brookings Tax Policy Center, where he specializes in retirement policy and tax policy issues. Between 2001 and 2004, he served as Director, National Headquarters Office of Research, at the Internal Revenue Service. Dr. Toder previously held a number of positions in tax policy offices in the U.S. government and overseas, including service as Deputy Assistant Secretary for Tax Analysis at the U.S. Treasury Department, Deputy Assistant Director for Tax Analysis at the Congressional Budget Office, and consultant to the New Zealand Treasury. He received his Ph.D. in economics from the University of Rochester in 1971. .
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Alan D. Viard
Alan D. Viard is a resident scholar at the Amcrican Enterprise Institute for Public Policy Research. Prior to joining AEI, Alan Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio Stale Universjty. He has also worked for the Treasury Department's Office of Tax Analysis, the White House's Council of Economic Advisers, and the Joint Committee on Taxation of the U.S. Congress.
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