Spatial Tax Competition and Domestic Wages

Using a unique, self-compiled dataset on international tax rates, we explore the link between taxes and manufacturing wages for a panel of 65 countries over 25 years. We find, controlling for other macroeconomic variables, that wages are significantly responsive to corporate taxation. Higher corporate tax rates depress wages. We also find that tax characteristics of neighboring countries, whether geographic or economic, have a significant effect on domestic wages. These results are consistent with the frequently employed assumptions in the public finance literature that capital is highly mobile, but labor is not. Under these conditions labor will bear the burden of capital taxes.

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Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI. Aparna Mathur is a resident scholar at AEI.

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