Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany

45 Pages Posted: 18 May 2013

See all articles by Clemens Fuest

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

Sebastian Siegloch

University of Mannheim - Department of Economics; IZA Institute of Labor Economics; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research; CESifo (Center for Economic Studies and Ifo Institute); University of Cologne - Cologne Centre for Public Economics (CPE)

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Abstract

Because of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by using an 11-year panel of data on 11,441 German municipalities' tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with our theoretical model, we find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates, while the conventional indirect wage effect through reduced investment is empirically small due to regional labor mobility. High and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.

Keywords: business tax, wage incidence, administrative data, local taxation

JEL Classification: H2, H7, J3

Suggested Citation

Fuest, Clemens and Peichl, Andreas and Siegloch, Sebastian, Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany. IZA Discussion Paper No. 7390, Available at SSRN: https://ssrn.com/abstract=2266817 or http://dx.doi.org/10.2139/ssrn.2266817

Clemens Fuest (Contact Author)

ifo Institute – Leibniz Institute for Economic Research at the University of Munich ( email )

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Ludwig-Maximilians-University, Munich ( email )

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Center for Economic Studies (CES) ( email )

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Andreas Peichl

ZEW – Leibniz Centre for European Economic Research ( email )

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University of Mannheim - School of Economics (VWL) ( email )

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IZA Institute of Labor Economics ( email )

P.O. Box 7240
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Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
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United Kingdom

Sebastian Siegloch

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Cologne - Cologne Centre for Public Economics (CPE) ( email )

Germany

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