Who Bears the Corporate Tax? A Review of What We Know

Who bears the corporate income tax? The answer to this question is important to our understanding of the distribution of tax burdens, but it has been elusive. Although the tax accounts for a small share of federal revenues, changes in the corporate income tax and its associated revenues have often been a significant part of revenue legislation. Moreover, because its incidence is often perceived to fall on the affluent, assignment of the corporate tax burden can have a significant impact on the assessed progressivity of the tax system as a whole. This paper reviews what we know from economic theory and evidence about the burden of the corporate income tax. While the ultimate incidence of the tax remains somewhat unresolved, there have been many advances over the years in our thinking about how to assign the corporate tax burden. Among the lessons from the recent literature are the following: 1. For a variety of reasons, shareholders may bear a certain portion of the corporate tax burden. In the short run, they may be unable to shift taxes on corporate capital. Even in the long run, they may be unable to shift taxes attributable to a discount on "old" capital, taxes on rents, or taxes that simply reduce the advantages of corporate ownership. Thus, the distribution of share ownership remains empirically quite relevant to corporate tax incidence analysis, though attributing ownership is itself a challenging exercise. 2. One-dimensional incidence analysis—distributing the corporate tax burden over a representative cross-section of the population—can be relatively uninformative about who bears the corporate tax burden because it misses the element of timing. 3. It is more meaningful to analyze the incidence of corporate tax changes than that of the corporate tax in its entirety because different components of the tax have different incidence, and incidence relates to the path of the economy over time, not just in a single year.