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 18
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42tax. These wages changes could be transitory effects on wages so that the short-run relationship
between wages and corporate taxes overstates the long-term effect.
Second, an important challenge for any empirical estimates of the response to taxes is to
find exogenous changes in tax policy. To evaluate the long-term effects of policy, one needs data
on permanent changes in policy and considerable amounts of data before and after these policy
changes. Given the relatively modest time horizons in the papers and the relative infrequency of
major corporate tax reforms, it is unclear whether the measured effects are capturing the long-run
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effects of tax policy.
Moreover, a common fear in econometric analysis is that the policy is
endogenous to the variable of interest. For the relationship between wages and corporate taxes,
this fear leads to the concern that governments shift towards higher capital taxation just before
the returns to labor fall. Instead of the causality flowing from corporate taxes to wages, lower
predicted wages induce higher capital taxation.
Third, the magnitudes of the results seem quite large based on a priori expectations about
corporate tax incidence. In many specifications across the three papers, modest shifts in
corporate tax policy lead to substantial changes in labor income. As will be discussed below,
some theoretical models would support effects of the magnitudes reported but many
parameterizations of theoretical models suggest the estimated effects are implausibly large.
Nonetheless, the evidence suggests rethinking the common assumption that capital bears all of
the corporate income tax seems warranted. Even if the true effect of how much of the corporate
tax is borne by labor is smaller than most of the point estimates suggest, labor could bear a
substantial burden from the corporate tax. The controversial nature of the results suggests that
future empirical work building on these studies is necessary before drawing definitive
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Since ADM focus on firm-level variation in effective tax rates, their estimates are not susceptible to the criticism
that tax policy is endogenous.
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