The statutory incidence of a corporate income tax falls unambiguously on firms—they write the checks to revenue authorities. But economic incidence, the question of whose real consumption possibilities decline, operates through entirely different channels. General equilibrium adjustments transmit the initial tax burden through factor markets, product markets, and capital markets in ways that may leave shareholders bearing only a fraction of the ultimate cost.

This distinction between legal and economic incidence has profound implications for tax policy design. If corporate taxes are borne primarily by capital owners, they serve as progressive instruments taxing the wealthy. If workers bear substantial portions through reduced wages, the distributional case weakens considerably. The empirical stakes are enormous: estimates of labor's share of corporate tax incidence range from near zero to over one hundred percent across different methodological approaches.

Understanding this variation requires examining the underlying economic mechanisms with precision. The Harberger tradition of closed-economy analysis yields fundamentally different predictions than open-economy models with perfect capital mobility. Market structure assumptions transform burden distribution. Dynamic considerations separate immediate impacts from long-run steady-state outcomes. Each analytical choice drives divergent conclusions about who ultimately pays.

The foundational Harberger model analyzed corporate tax incidence in a closed economy with two sectors. Under perfect competition and factor mobility between sectors, the burden distribution depends on relative elasticities and factor intensities. With plausible parameterizations, capital bears most of the burden because it cannot escape to an untaxed sector—the corporate tax merely redistributes capital across domestic uses while reducing its overall return.

International capital mobility fundamentally transforms this analysis. When capital can flow across borders in response to tax differentials, the supply of capital to any individual country becomes highly elastic. In the limiting case of perfect capital mobility and a small open economy, domestic capital supply is infinitely elastic at the world rate of return. The entire burden of a source-based corporate tax then shifts to immobile factors, primarily labor.

The mechanism operates through investment responses. Higher corporate taxes reduce the after-tax return to investing in the taxing jurisdiction. Capital flows outward until pre-tax returns rise sufficiently to restore after-tax parity with world markets. This capital outflow reduces labor's marginal product, depressing wages. Workers bear the burden not through any direct tax payment but through the equilibrium adjustment of factor markets.

Empirical estimation of these effects confronts formidable identification challenges. Cross-country studies examining wage-tax correlations face severe endogeneity concerns—tax policy responds to economic conditions that independently affect wages. Spatial identification strategies exploiting within-country tax variation may capture different margins than international capital flows. The methodological heterogeneity explains much of the variance in estimated labor shares of corporate tax incidence.

Recent empirical work has attempted to isolate plausibly exogenous tax variation. Fuest, Peichl, and Siegloch exploit variation in German municipal business taxes, finding substantial wage responses suggesting labor bears roughly half the corporate tax burden. Suárez Serrato and Zidar use identification strategies based on state apportionment rules, estimating that firm owners bear the majority. The divergence reflects different institutional contexts, time horizons, and margins of adjustment.

Takeaway

The degree of international capital mobility determines whether corporate taxes function as taxes on capital or on labor—policy design requires knowing which regime better characterizes your economy.

Standard incidence analysis assumes perfect competition, but corporate taxes apply primarily to incorporated businesses that often possess market power. Imperfect competition fundamentally alters burden distribution through channels absent from competitive models. Firms with pricing power face different adjustment margins than price-taking competitors.

Under monopolistic competition or oligopoly, firms set prices as markups over costs. A corporate tax reduces after-tax profits, but the profit-maximizing price need not change if the tax doesn't affect marginal cost or demand elasticity. In Cournot oligopoly with identical firms, corporate taxes have no effect on output or prices in the short run—the burden falls entirely on shareholders through reduced rents.

This clean result breaks down when firms are heterogeneous. If corporate taxes fall differently across firms—through variation in effective rates, loss offset provisions, or R&D incentives—they alter relative competitive positions. High-tax firms contract while low-tax competitors expand. Industry-level output and prices adjust even when individual firm optimization suggests no response. The incidence then depends on the distribution of tax burdens across the firm size and productivity distribution.

The extensive margin of firm entry further complicates analysis. If economic profits attract entry under free entry conditions, long-run profits net of entry costs equal zero. Corporate taxes that reduce after-tax profits deter entry, reducing product variety and competition. The ultimate burden falls on consumers through reduced variety and on factor owners through reduced demand for inputs. Shareholder incidence disappears when rents are competed away.

Firm heterogeneity introduces additional complexity through selection effects. If only the most productive firms can profitably incorporate, corporate taxes selectively burden high-productivity activities. Resources reallocate toward lower-productivity organizational forms, reducing aggregate output. The efficiency cost compounds the incidence question—the burden measured in reduced welfare exceeds the mechanical redistribution of purchasing power.

Takeaway

Market structure determines whether corporate taxes reduce shareholder rents, raise consumer prices, or depress factor returns—the competitive model's predictions can be completely reversed under alternative assumptions.

Static incidence analysis captures long-run steady-state burden distribution but obscures the transition dynamics that may persist for decades. The distinction matters enormously for policy evaluation. Short-run and long-run incidence can differ dramatically, with capital bearing transitional burdens that ultimately shift to labor.

In the immediate aftermath of a corporate tax increase, capital is largely fixed in place. Installed equipment cannot instantaneously relocate; trained workforces and organizational capital tie firms to locations. The short-run capital supply is highly inelastic, and shareholders bear the burden through capitalized decreases in asset values. Stock price responses to tax announcements reflect this immediate incidence.

The adjustment to long-run equilibrium operates through investment flows. Reduced after-tax returns to capital discourage new investment, gradually reducing the capital stock. As capital-labor ratios decline, labor productivity falls and wages decrease. The burden progressively shifts from capital to labor over the adjustment horizon. The half-life of this transition depends on depreciation rates and adjustment costs—estimates range from years to decades.

Overlapping generations models capture additional dynamics absent from infinitely-lived agent frameworks. A permanent corporate tax increase reduces capital accumulation, lowering wages for future generations who had no voice in the policy decision. Intergenerational incidence raises distinct equity considerations beyond the contemporaneous distribution among current factor owners and consumers.

Transitional dynamics also create asymmetries between tax increases and decreases. Capital gains and losses upon announcement capitalize expected future tax changes, creating windfall wealth effects divorced from behavioral responses. Existing asset owners gain from unexpected tax cuts they did nothing to earn. This distinction between old capital and new capital complicates both efficiency and equity assessments of tax reforms.

Takeaway

Announced tax changes are immediately capitalized into asset values, but the real burden on wages unfolds gradually over years as investment patterns adjust—short-run and long-run incidence assessments can reach opposite conclusions.

The dramatic variation in corporate tax incidence estimates across studies reflects genuine economic complexity rather than merely methodological inadequacy. Incidence is not a fixed parameter but depends on capital mobility, market structure, time horizon, and institutional context. Different economies and different tax instruments produce genuinely different burden distributions.

This sensitivity has direct implications for optimal tax design. If your economy features highly mobile capital and competitive markets, corporate taxes function primarily as labor taxes with substantial efficiency costs. If capital is relatively immobile and firms earn rents, corporate taxes can capture economic surplus with less distortion. The same statutory tax has radically different welfare properties across institutional environments.

Policymakers cannot escape these contingencies. Designing optimal corporate tax systems requires empirical assessment of the relevant elasticities and market structures, not appeals to ideological priors about who should bear burdens. The sophisticated analyst admits uncertainty while still providing bounded guidance based on the best available evidence.