Ota Paper 101: A Review Of The Evidence On The Incidence Of The Corporate Income Tax - William M. Gentry (Office Of Tax Analysis, Us Department Of The Treasury) Page 10
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42ADM estimate the magnitude of this second effect of the corporate tax. Thus, their
empirical approach does not capture the general equilibrium effects created by shifts in capital
intensity. They use firm-level data on 15,433 firms from four European countries (France, Italy,
Spain, and the UK) from the period 1993-2003. The dependent variable in their analysis is the
logarithm of employee compensation per worker. They measure corporate tax burdens as the
logarithm of the firm-level corporate tax liability per worker; this tax variable measures the
amount of tax paid by the firm rather than a corporate tax rate. In addition to taxes, their
empirical specification allows for compensation to depend on lagged compensation, value-added
per worker, and year fixed effects. The inclusion of value-added per worker leads to their
interpreting their results as arising from the bargaining channel; if the corporate tax leads to shifts
in capital intensities, then these effects will be captured by the inclusion of the value-added per
worker variable since changes in capital intensity will affect worker productivity and value-added
per worker. The broader general equilibrium effects of the corporate tax would have additional
effects on wages, returns to capital, and output prices.
Due to issues of endogeneity of the tax and value-added variables and persistence in the
lagged dependent variable, ADM use several years of lagged data as instruments; the use of
lagged variables as instruments reduces the useful time period over which they estimate their
model to the last four years of the sample period. The ADM empirical model exploits variation
in effective tax rates (i.e., tax liability relative to profit) across firms and over time. Since the
effective tax rate is endogenous to profits and wages, they use lagged tax variables as well as
country-specific measures of statutory tax rates and effective marginal and average tax rates as
instruments. Thus, while they measure corporate taxes using corporate taxes per worker, they
instrument for this tax measure using a variety of measures of the corporate tax rate.
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