Corporate Tax Reform and Wages: Theory and Evidence

The productivity of workers in an economy depends, in part, on the flow of capital services enabling their production. Even in a closed economy, reductions in the corporate tax rates and the associated capital deepening may imply a higher marginal product of labor and higher wages. The ability of domestic U.S. firms to invest foreign profits overseas exacerbates the implications of corporate tax policy for domestic workers; an uncompetitive domestic corporate tax rate reduces the demand for U.S. workers by encouraging capital formation abroad. Indeed, when viewed in this way, the incidence of the corporate tax could theoretically fall entirely on U.S. workers, so long as workers are immobile and capital moves freely across borders.

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