Do higher corporate taxes reduce wages or working hours?

• In Event: Wage Against the Machine

Abstract

In principle, firms have two margins to reduce their labor costs in a response to higher business taxes. They can adjust wages to shift the burden of business taxation to labor (corporate tax incidence) or they can reduce their labor demand at the extensive margin (number of staff members) or at the intensive margin (number of hours per staff member). Due to data limitations, previous research on corporate tax incidence implicitly assumes a constant number of working hours per staff member and interprets reductions of wages per staff member as a reduction in hourly wages. Using the AFiD Panel Industrial Establishments of the German Federal Statistical office including information on working hours, we analyze if changes in local business tax (LBT) rates in German municipalities affect wages per working hour and/or the number of hours per staff member. A wide range of empirical tests provides robust evidence that higher LBT rates in German municipalities reduce the number of working hours (labor demand), but not alter the wage per working hour (tax incidence). In addition, our evidence suggests that establishment level effects partially result from payroll shifting between establishments of multi-establishment firms. Controlling for payroll shifting, we find statistically significant and negative tax effects on working hours (labor demand), but no empirical evidence that firms shift their tax burden on hourly wages (corporate tax incidence).

Authors

• Sebastian Eichfelder, Otto von Gueriekellan Magdeburg

• Hang Nguyen

• Kelly Wentland, George Mason University