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 6
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42savings (and, hence, capital formation in a closed economy) does not respond strongly to the
return to saving. In contrast, many open economy models predict that labor will bear the burden
of the corporate tax under the assumption that capital is more mobile across countries than labor.
As Harberger (1995) points out, while the open economy assumption has considerable
appeal as capital markets become more integrated, whether one should think in terms of the
closed economy or open economy model also depends on whether all countries simultaneously
change tax policy or a single country acts independently of other countries. If all countries
simultaneously change their corporate income tax rates in a coordinated fashion, then the closed
economy that focuses on the response of the total capital stock to the return to saving may be
more appropriate than the open economy model that focuses on capital moving across borders.
In contrast, if one wants to consider the effects of a single country changing its corporate tax rate
holding other countries policies as fixed, then capital mobility across countries plays an
important role in the analysis. Thus, the incidence of the corporate tax may depend heavily on
the specifics of the proposed policy change and how other countries will respond to the policy
change.
While general equilibrium models have been mainstays in analyzing the incidence of the
corporate income tax, both Auerbach’s (2006) recent review of the incidence of the corporate
income tax and the empirical results of Arulampalam, Devereux, and Maffini (2007, discussed
below) suggest that forces that are difficult to capture in such models may play an important role
in determining who bears the tax. Specifically, Auerbach provides a number of reasons why
shareholders may bear the burden of the tax without passing the tax to all capital owners,
especially in the short term. One such mechanism is that the corporate tax falls, in part, on
economic profits. However, Arulampalam, Devereux, and Maffini’s empirical results focus on
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