Policy Documents

Personalizing the Corporate Income Tax

Gerald Prante and Scott A. Hodge –
October 25, 2007

The U.S. corporate tax rate—now the second highest among OECD nations—is getting renewed attention as countries ranging from Malaysia to Germany are cutting their corporate tax rates to remain competitive in the global race for capital investment and jobs. The federal statutory corporate tax rate of 35 percent is now as much as 10 percentage points higher than the average corporate tax rate among European Union countries.

Typically, the arguments for cutting the U.S. corporate tax rate center on improving the ability of American firms to compete globally and making the U.S. more attractive for investment by foreign firms. While true, these arguments overlook who actually bears the economic burden of the corporate tax and who will benefit most from cutting corporate taxes—American workers, investors, and consumers.

Economists have traditionally been divided on whether the eventual economic burden (or incidence) of corporate taxes falls on consumers through higher prices, workers through lower wages, or shareholders through smaller dividends. Decades of Tax Foundation studies assumed an even split among the three groups. Recently, however, this longstanding assumption of a third/a third/a third has been challenged.

New research is indicating that in a global economy over the long-term, where capital is highly mobile but workers are not, labor is bearing the brunt of corporate taxation. In a working paper for the Congressional Budget Office, William Randolph concludes that under certain assumptions of freely flowing capital, 70 percent of the burden of corporate taxes falls on domestic workers while the remaining 30 falls on owners of capital.

When Tax Foundation economists Andrew Chamberlain and Gerald Prante put forth two reports in March 2007 estimating the federal tax burden by geographic regions and the fiscal incidence of the U.S. fiscal system, they used Randolph's assumption when measuring how the burden of the U.S. corporate tax affects various American households. These results should bring a new perspective to the debate over cutting the corporate tax rate.

Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced.