Is the Corporate Tax Progressive?

By :: February 22nd, 2010

Economists can't seem to agree about whether the corporate tax falls on the rich or the poor. We pretty much concur that sales and payroll taxes are regressive and that income and estate taxes are progressive, but we argue endlessly about whether the burden of the corporate tax falls more on the wealthy or the middle class.

This is an important question because progressivity—the notion that the wealthy pay a proportionately higher share of the tax—is one justification for having a corporate tax in the first place. To my mind, for all of its flaws, the corporate tax is progressive.

The heart of the progressivity question is the issue of corporate tax incidence. That is, who really pays the corporate tax? While a corporate officer may sign the check to the IRS, the money to pay the bill either comes from workers or capital owners (or both). Conventional wisdom among economists is that the corporate tax is regressive if it leads to lower wages and progressive if it leads to lower returns to capital.

Many economists have tried to sort out where the incidence falls, but their conclusions are all over the map. Some theoretical papers conclude that the corporate tax falls primarily on labor through lower wages. Others report the tax falls mostly on capital through lower returns to investors. And still others say both labor and capital pay a share. A series of empirical papers finds that the corporate tax burden does lead to lower wages, though they generally don't agree about why.

This is an important debate, but when it comes to progressivity, it may not matter much. That's because whether the tax hits wage-earners or capital owners, it still falls disproportionately on wealthy individuals. Why? Because wealthy households tend to have substantial income from both wages and capital. Workers who have high wages also tend own a lot of capital, and investors with a lot of capital usually (though not always) have high wages.

Additional details are presented here, but the bottom line is simple: The corporate tax is generally progressive whether it falls 80 percent on labor, for example, or 80 percent on capital, or is split evenly between the two. While these assumptions may affect the degree of progressivity, the tax is still disproportionately paid by wealthier households.

This doesn't mean the corporate tax is perfect. The merit of a tax depends not only on fairness, but also compliance and efficiency. By these criteria the corporate tax comes up short. For example, just about everyone agrees the tax is inefficient due to a toxic mix of a high tax rate, a diluted tax base, and a host of tax provisions that distort corporate behavior. But at least it's progressive, and that's true whether the tax is paid by labor or capital.