High US State Corporate Taxes Pushing Down Wages

by Mike Godfrey, Tax-News.com, Washington

12 August 2009

A new report by the Tax Foundation finds that states with high corporate income taxes have likely depressed their workers' wages over the long term, while states with low corporate taxes have boosted worker productivity and real wages.

The Tax Foundation study finds that for every USD1 rise in state and local corporate tax collections, real wages fall by USD2.50 five years later. The reverse is also true, with wages rising USD2.50 for every USD1 reduction in state and local corporate income taxes.

"These findings are not only consistent with a growing body of research on international corporate income taxes and wages, but they get to the heart of a longstanding political argument on business taxation," said Tax Foundation Senior Fellow Robert Carroll.

"Raising corporate income taxes has been viewed as an effective way for governments to push the tax burden onto the people who can best afford it, but this assumes that capital income, which is earned disproportionately by those with higher incomes, is indeed bearing the burden of the tax. We now see, however, an increasing amount of evidence suggesting that this is not the case,” he observed.

According to Carroll, the finding that the burden of corporate income taxes ultimately falls on labor supports previous research indicating that corporate taxes are not borne by capital because, in today's increasingly global economy, capital is mobile, but labor is not.

“This emerging research should give pause to state and federal policy makers who are attempting to increase the progressivity of the tax code by increasing corporate income taxes. If the tax is borne primarily by labor, such policy changes are not likely to increase the progressivity of the tax code,” the report concluded.

Recommended