Spatial Tax Competition and Domestic Wages
Kevin A. Hassett, Aparna Mathur
December 01, 2010

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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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About the Author

 

Kevin A.
Hassett
  • Before joining AEI, Mr. Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at the Graduate School of Business of Columbia University, as well as a policy consultant to the Treasury Department during the George H. W. Bush and Clinton administrations. He served as an economic adviser to the George W. Bush 2004 presidential campaign, chief economic adviser to Senator John McCain during the 2000 presidential primaries, senior economic adviser to the McCain 2008 presidential campaign, and economic adviser to the Mitt Romney 2012 presidential campaign.   Mr. Hassett is a columnist for National Review.

  • Phone: 202-862-7157
    Email: khassett@aei.org

  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org
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Aparna
Mathur
  • Aparna Mathur is an economist who writes about taxes and wages. She has been a consultant to the World Bank and has taught economics at the University of Maryland. Her work ranges from research on carbon taxes and the impact of state health insurance mandates on small firms to labor market outcomes. Her research on corporate taxation includes the widely discussed coauthored 2006 "Wages and Taxes" paper, which explored the link between corporate taxes and manufacturing wages.
  • Phone: 202-828-6026
    Email: amathur@aei.org

  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org
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