Article Review:
DO STATE CORPORATE INCOME TAXES REDUCE WAGES?

Lincoln Memorial University
Andrea B. Lee
MBA 624 Public Policy & Finance
Dr. Okeniyi Oke

EXECUTIVE SUMMARY
In this article, the author, Alison Felix, discusses the impact of state corporate taxes on wages. Felix describes the history of taxes and how prior research explains that corporate tax burden can fall on shareholders, consumers, and workers. In addition, this article examines the effect of corporate taxes across different education groups. Her purpose was to update and extend prior research to demonstrate how corporate taxes have a larger negative effect on more highly educated people, as well as low-income laborers in society. She describes how over the past 30 years, the magnitude of the negative relationship between taxes and wages.
ANALYSIS
To illustrate how corporate taxes began, the author describes how in 1911, Wisconsin was the first state to levy a successful income tax and soon other states adopted similar taxes. Currently, Nevada, Wyoming, and Washington are the only state that does no tax corporate income. For all the other states corporate tax revenues make up about 7 percent of total state tax revenues. How is this percentage figured? The author explains how different states have different tax structures. This causes complications when it comes figuring the tax base, determining what profit is taxable, and how much weight is placed on the corporation’s payroll, property, and sales. By focusing on sales, policymakers hope to entice firms to locate in their state to create jobs (with a lower payroll weight) and build new facilities (with a lower property weight). (Felix, 2009)
Even though corporations are the ones responsible for remitting corporate taxes to the state, the burden can fall on shareholders, consumers, and workers. It is believed that corporate shareholders will pay the corporate tax in the form of lower profits if corporations are unable to shift the burden of the tax. However, in 1962 it was also theorized that the tax would be shared entirely by both shareholders and non shareholders.
Many believe that corporate taxes essentially raise the cost of production for corporations. Therefore, corporations raise prices to compensate for that additional cost so consumers bear the burden on tax in the form of higher prices for products and services.
Recent economic research describes that labor bears the majority of the corporate tax burden at a national level. In a competitive market, the return to capital is equal to the marginal productivity of capital, and the wage is equal to the marginal productivity of labor. State corporate tax encourages capital to leave the state; leaving the workers less capital to use. Workers become less productive, which lowers the marginal productivity of labor, resulting in earning lower wages, therefore they end up with the burden.
COCERNS/ISSUES
Most of the economic literature researching the impact of taxes on wages has focused on national corporate tax rate. Many studies that focused on estimating labor’s share found that over time, labor bears close to 100 percent of the tax burden. These studies used different data and methodologies, however they all concluded that labor bears a substantial burden on the national corporate tax (Felix,2009). There has been strong evidence of corporate taxes shifting towed labor. Using 1980 data on wages from 125 U.S. cities found that one-percentage point in tax rate reduced annual wages by 1 percent.
Felix wanted to update and extend the data to identify more recent effects of state corporate taxes on wages and analyze how the burden of labor has changed over time using data from 1977 to 2005.
A regression analysis was used to confirm that marginal state corporate tax rate has a negative effect on wages. This analysis was duplicated for each five-year period since 1977, the results showed a negative effect on wages in every time period.
Another concern was that vast literature has shown that additional schooling increases wages, although no studies have investigated how state corporate taxes influence wages with different educational levels. Felix’s divided individual into groups: a high school diploma, high school diploma but with no college degree, and those with at least a bachelor’s degree. Her results showed a one-percentage-point increase in marginal tax rate reduces the wages of college-educated workers 0.44 percent compared to workers without a high school education of only 0.26 percent confirming the issue that higher corporate taxes has a larger effect on wages as education levels increase. As capital leaves the state in response to higher taxes, the most highly skilled workers experience the largest decline and productivity and wages. This is a concern for many reasons one of them being that additional capital increases the productivity of educated workers more than less-skilled workers (Felix, 2009). For example; management information systems employees would be more productive if they had the access to the latest technology. However; as capital leaves a state in response to higher corporate taxes, this would hurt the productivity of those workers more than low-skilled workers that did not use the technology in their job. RECOMMENDATIONS
States should take into consideration that because corporate taxes reduce wages, they may also influence that attraction and retention of highly educated workers. Behavioral changes, from corporations and individuals, to avoid paying higher taxes create inefficiencies. Corporate tax creates an inefficient allocation of capital between corporate and non corporate firms within a state. Additionally, the mobility of capital leads to an inefficient allocation among states, as capital flees states that impose higher corporate taxes. When all this is looked at, states might be better off generating revenue other than by raising corporate taxes.

REFERNCES

Felix, A. (2009). Do State Corporate Income Taxes Reduce Wages? Economic Review, 94(2), 77-102. Retrieved June 20, 2011, from the Academic Source Premier database.