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 15
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42as large (and somewhat less statistically significant) as when they use the top corporate marginal
tax rate. Thus, the magnitude of the effect is quite sensitive to how the tax rate is measured.
Given that ADM suggest that controlling for value added as a measure of productivity
should make it difficult to estimate the effects of corporate taxes on wages that come through
changes in capital intensity, one question about Hassett and Mathur’s results is whether they are
sensitive to controlling for value added. To address this issue, Hassett and Mathur estimate a
two-step procedure in which corporate taxes can affect the capital-labor ratio (the first stage) and
the capital-labor ratio can affect the wage rate (the second stage). While Hassett and Mathur find
support for this two-step process in determining wage rates, they do not report estimates of the
magnitude of the overall effect of corporate taxes on wages based on the estimated coefficients
from this two-stage model.
Hassett and Mathur report two auxiliary results that suggest that international capital
flows may play a substantial role in driving the results. First, in specifications that include wage
rates and corporate tax rates in neighboring countries (defined either geographically or by income
group), they estimate that both the wage rate and corporate tax rates of the neighboring countries
have a positive effect on a country’s wage rate. One explanation for this result is that a country
(and its workers) benefit from higher capital investment when its neighbors have either high
wage rates or high corporate taxes. Second, the estimated effects of the corporate tax rate are
stronger for smaller countries, which one would expect are more vulnerable to the effects of
being open economies.
Since Hassett and Mathur’s original work, several authors have based other work on their
approach. Felix (2007) uses her data to estimate a specification that is similar to Hassett and
Mathur’s main specification. Recall that her data focuses on developed countries and that the
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