State Corporate Income Taxes Hurt Workers' Wages
$1 Increase in State-Local Corporate Tax Rate Causes $2.50 Drop in Wages Five Years Later

A new Tax Foundation report shows that the burden of corporate income taxes is likely borne by workers – not investors. This finding throws more cold water on the notion that higher corporate income taxes would provide greater progressivity in the tax system.

High corporate income taxes are often justified by the rhetoric that businesses – and their high-income investors – should “pay their fair share.” In Tax Foundation Special Report No. 169, “The Corporate Income Tax and Workers’ Wages: New Evidence from the 50 States,” Senior Fellow Robert Carroll, Ph.D., 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.

“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,” Carroll said. “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.”

This new Tax Foundation study finds that for every $1 rise in state and local corporate tax collections, real wages fall by $2.50 five years later. The reverse is also true: Wages rise $2.50 for every $1 reduction in state and local corporate income taxes.

This 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 capital, in today’s increasingly global economy, is mobile, but labor is not.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.