Influencing capital income taxation in the United States

Research by Professor Céline Azémar (UofG) and Professor Glenn Hubbard (Columbia University) challenged the US Congressional Budget Office orthodoxy that most of the burden of corporate tax is borne by those with capital. This research influenced the adoption by the US Federal Government of a pro-growth tax plan ‘Tax Cuts and Jobs Act 2017’ and the decision to decrease the US corporate tax rate from 35% to 21%.

The research

Nominal tax incidence (who pays the tax) can be quite different from effective tax incidence (who bears the economic burden). For instance, a higher tax burden can be shifted to consumers through higher prices or to workers through lower wages.

Knowing who actually bears the burden of capital income tax is crucial for understanding both the progressivity of the overall tax system and inefficiencies caused by distortions in the allocation of capital.

Azémar and Hubbard examined the incidence of corporate income taxes on wages for 13 OECD countries, including the United States (prior to this, there were limited studies into such taxes on wages that included the US).

Azémar and Hubbard’s research produced new evidence, in line with mainstream economic theory, that capital escapes part of the tax burden by shifting it to labour via lower wages. On this basis, a corporate tax cut would benefit households by increasing wages.

The impact

Azémar took a visiting researcher position at Columbia University in 2011, where she met Professor Glenn Hubbard, then Dean of its Graduate Business School. As they both shared a research interest in the incidence of corporate taxes, Azémar proposed a collaborative study. Hubbard has extensive experience in the US Federal Government and his prominence in policy circles provided a realistic pathway to impact on US fiscal decisions.

In 2018, the Economic Report of the President cited Azémar and Hubbard’s research among a body of academic literature on the effects of taxing corporate income.

Estimates from their study and the link they establish between corporate tax rates and wages was a key justification for a decrease in the US corporate tax rate from 35% to 21%.

The direct beneficiaries of the US tax reforms are corporations which benefit from a lower corporate tax rate. The indirect beneficiaries are expected to be American workers via an increase in their wages.

Workers in the US have experienced long-term real wage stagnation. Given the link between corporate tax rates and wages, as found in Azémar and Hubbard’s research, the US pro-growth tax plan would lead to a rise in incomes for American workers.