Journal Review: The Incidence of the Corporate Tax by Eric Toder

February 6, 2025

Introduction

Eric Toder’s chapter, The Incidence of the Corporate Tax, explores the long-debated question of who ultimately bears the burden of corporate income tax in the United States. He provides a detailed framework for analyzing tax incidence, distinguishing between legal tax obligations and the economic burden that taxation imposes on different stakeholders. The study synthesizes various perspectives from tax policy literature, including historical and contemporary analyses, to evaluate how corporate tax affects labor, capital, and different income groups.

Key Themes and Findings

1. Tax Incidence and Economic Burden

Toder explains that while corporations legally pay the corporate income tax, the economic burden is distributed among different stakeholders. He differentiates between the normal return on corporate equity (which is necessary to attract investment) and supernormal returns or economic rents (profits exceeding the required investment return). Understanding this distinction is crucial for determining how the corporate tax affects business decisions and income distribution.

2. Who Bears the Tax?

The study explores different theoretical perspectives on corporate tax incidence. Traditionally, economists assumed that capital owners bore the full burden of the tax. However, more recent models suggest that workers also share in this burden, as higher corporate taxes can lead to reduced capital investment, lower productivity, and, ultimately, lower wages. The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimate that about 50% of the burden falls on capital and 50% on labor.

3. Short-Term vs. Long-Term Effects

Toder highlights that in the short term, the corporate tax burden primarily affects shareholders through lower returns on investment. However, in the long run, capital mobility allows investors to shift their resources to lower-tax jurisdictions, which can reduce domestic investment and slow wage growth. This global perspective on tax incidence has gained prominence with increased capital mobility and the growth of multinational corporations.

4. Economic Rents and Progressivity

One of the study’s major contributions is its discussion of how much corporate tax revenue derives from economic rents versus normal returns. The corporate tax is more progressive if it primarily falls on economic rents because shareholders—who tend to be wealthier—capture these excess profits. Toder cites estimates suggesting that 60-80% of corporate tax revenue comes from taxing economic rents, making it a highly progressive tax.

5. Policy Implications

Toder discusses the policy tradeoffs involved in corporate taxation. While reducing corporate tax rates could encourage investment and economic growth, it would also lead to revenue losses and potential increases in income inequality. Policymakers must balance these considerations when designing tax policies that promote economic efficiency without exacerbating fiscal deficits or inequality.

Conclusion

Toder’s analysis offers a comprehensive and nuanced perspective on corporate tax incidence. His discussion bridges traditional tax theory with modern economic developments, including globalization and changes in corporate structure. By emphasizing the importance of distinguishing between normal returns and economic rents, he provides valuable insights for policymakers and economists alike. The chapter reinforces the idea that corporate tax incidence is not a straightforward issue, as it depends on various economic interactions, behavioral responses, and institutional factors.