Who Really Pays? Reevaluating the Corporate Tax Burden
Evidence shows that workers and consumers bear most of the costs
The incidence of corporate taxation remains one of the most important and often misunderstood questions in public finance. Decades of empirical research, however, tell a different story. The corporate tax is not just a tax on corporations — it is a tax on people. Workers and consumers pay through lower wages and higher prices.
When politicians talk about raising corporate taxes, the assumption is often that the burden will fall squarely on corporations and their shareholders. In the United States, that assumption underpins the way agencies such as the Congressional Budget Office (CBO), the Joint Committee on Taxation, and the U.S. Department of the Treasury allocate the burden in their models: They estimate that 75–82% of the corporate tax burden falls on owners of capital.
But in an open global economy where capital is highly mobile, it is often workers and consumers, not just shareholders, who pay the price of higher corporate taxes. My new policy brief, Who Really Pays? Reevaluating the Corporate Tax Burden, synthesizes the literature on corporate taxes, revisits conventional assumptions and examines what the evidence actually shows about who shoulders the cost.
The Model from Harberger to the Modern Open Economy
The starting point for this debate is economist Arnold C. Harberger’s 1962 paper The Incidence of the Corporate Income Tax, which assumed a closed economy. Under Harberger’s framework, corporate taxes primarily reduce capital returns and only marginally affect labor.
But since then, the world has changed dramatically. Economies are more open, capital flows across borders more freely than ever, and production can relocate to wherever the tax and regulatory environment is most favorable. Recognizing this, in 2008 Harberger himself revisited his earlier work and came to the opposite conclusion: In an open economy, corporate taxes ultimately erode the capital stock and lower real wages.
Additional refinements, including the influential models of economist William Randolph CBO working paper, emphasize the dynamic between corporate taxes and real wages. The findings suggest that in an economy with high capital mobility, labor can bear the vast majority of the corporate tax burden — sometimes as much as 70–80%.
The Evidence from Around the World
The theory is compelling, but what does the data show? A broad range of cross-country, country-specific, and firm-level studies reinforces the conclusion that labor shoulders much of the burden.
Cross-country analyses: Economists Kevin A. Hassett and Aparna Mathur find that a one-point increase in corporate tax rates reduces wage rates by about a half percent across countries. Similarly, a study Alex Felix of the Federal Reserve Bank of Kansas City shows that a 10-point corporate tax hike is associated with a 7% fall in average wages across OECD nations.
Country-specific studies: German economists Clemens Fuest, Andreas Peichl, and Sebastian Siegloch examined variation in regional tax rates and found that workers bore roughly 77% of the corporate tax burden. Importantly, lower-wage workers in labor-intensive industries suffered the steepest wage reductions, highlighting the regressive nature of the tax. Canadian economists Pouya Embrahimi and François Vaillancourt echo these results, finding wage cuts of 0.5–0.9% for each point increase in the corporate tax.
Firm-level evidence: Using microdata from European firms, economists Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini show that half of every additional dollar of corporate tax is shifted onto workers in the form of lower wages. Other studies including one by the The Tax Foundation Robert Carroll finds that over the long run, wage reductions can even exceed the initial tax increase, as diminished capital formation drags down productivity and earnings.
The evidence doesn’t stop at wages. A paper by economists Scott R. Baker, Stephen Teng Sun, and Constantine Yannelis from the National Bureau of Economic Research, and other research, demonstrate that corporations also pass taxes through to consumers via higher prices. Depending on the market, consumers may bear 40–60% of the tax burden, particularly where competition is limited or demand is inelastic.
What This Means for Policy
The policy implications of the evidence are profound. If workers and consumers bear the lion’s share of the corporate tax burden, then much of our tax policy discussion rests on faulty premises. By assuming that capital shoulders 75–82% of the burden, as official scoring agencies still do, policymakers underestimate the regressive impact of corporate taxation.
Raising corporate taxes may sound like a way to “tax the rich,” but the evidence suggests it disproportionately affects ordinary workers and households. Wages fall, prices rise, and economic opportunities shrink. For lower- and middle-income families, these effects are especially painful.
To design tax policy responsibly, policymakers must align their assumptions with the best available evidence. That means acknowledging that the incidence of corporate taxes falls far more heavily on labor and consumers than on capital.
The corporate tax is not just a tax on corporations — it is a tax on people. Workers pay through lower wages, consumers pay through higher prices, and only a minority of the burden is borne by shareholders. A more realistic framework grounded in empirical evidence would better reflect the economic consequences of corporate taxation and help avoid policies that unintentionally hurt the very people they are meant to help.
As the global economy continues to evolve, clinging to outdated models of tax incidence will only widen the gap between policy assumptions and economic reality. It’s time to update our thinking about who really pays the corporate tax. Scoring agencies should urgently revise their models to reflect this evidence, so that future tax debates are grounded in economic reality rather than outdated assumptions.