Using panel data for 72 countries and 22 years, we explore the link between taxes and manufacturing wages. We find, controlling for macroeconomic variables that have been found in the literature to influence wages, statistically significant evidence that wage rates are not responsive to median or average income tax rates. We find that wages are significantly responsive to corporate taxation, and that the responsiveness of wages to corporate taxation is larger in smaller countries. We also find that tax and wage 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 labor taxes, and bear or share the burden of capital taxes.
Kevin A. Hassett is a resident scholar and director of economic policy studies at AEI. Aparna Mathur is a research fellow at AEI.