The burden is shared among stockholders, workers, and all investors.
Shareholders bear most of the corporate income tax burden, but they aren’t the only ones. Over time, others bear some of the burden because of a chain reaction that begins with the shareholders.
The corporate income tax reduces shareholders’ after-tax returns, causing them to shift some of their investments out of the corporate sector. Shareholders will shift some investments to unincorporated (“pass-through”) businesses and some to foreign investments not subject to the US corporate income tax. The shift to these other sectors raises the price of the associated assets until the after-tax return (adjusted for risk) on investments in these sectors is about the same as in the U.S. corporate sector. Thus, the corporate income tax reduces investment returns in all sectors.
Shifting investments to foreign assets also reduces the amount of capital (machines, equipment, structures, etc.) complementing US workers, so their productivity, and therefore their wages and other compensation, fall.
A significant portion of the corporate tax (TPC estimates about 60 percent), however, falls on excess returns or economic rents. TPC assumes 100 percent of the tax on economic rents falls on corporate shareholders, although some recent research suggests some of tax on rent may be borne by other corporate stakeholders, primarily top management.
In calculating distributional effects, the Urban-Brookings Tax Policy Center (TPC) assumes investment returns (dividends, interest, capital gains, etc.) bear 80 percent of the burden, with wages and other labor income carrying the remaining 20 percent. However, TPC assumes that changes that affect normal returns to capital, such as changes in depreciation rules and other timing changes, are borne 50 percent by labor and 50 percent by all capital. These assumptions reflect TPC’s best estimate of the full, long-term economic consequences of investors responding to changes in the corporate income tax.
The Joint Committee on Taxation (JCT), the US Department of the Treasury’s Office of Tax Analysis (OTA), and the Congressional Budget Office (CBO) use assumptions about the division of the burden between capital and labor, but JCT and CBO do not distinguish between the effects of timing changes and other changes.
Updated January 2024
Congressional Budget Office. 2018. “The Distribution of Household Income, 2014.” Washington, DC: Congressional Budget Office.
Congressional Budget Office. 2019. “The Distribution of Household Income, 2016.” Washington, DC: Congressional Budget Office.
Cronin, Julie-Anne, Emily Lin, Laura Power, and Michael Cooper. 2013. “Distributing the Corporate Income Tax: Revised US Treasury Methodology.” National Tax Journal 66 (1): 239–62.
Gale, William G. and Samuel Thorpe. 2022. “Rethinking the Corporate Income Tax: The Role of Rent Sharing.” Washington, DC: Urban-Brookings Tax Policy Center.
Harberger, Arnold C. 1962. “The Incidence of the Corporate Income Tax.” Journal of Political Economy 70 (3): 215–40.
Joint Committee on Taxation. 2013. “Modeling the Distribution of Taxes on Business Income.” JCX-14-13. Washington, DC: Joint Committee on Taxation.
Nunns, Jim. 2012. “How TPC Distributes the Corporate Income Tax.” Washington, DC: Urban-Brookings Tax Policy Center.
Toder, Eric. 2023. “The Incidence of the Corporate Income Tax.” Forthcoming. In Reuven S. Avi-Yonah, editor. Research Handbook on Corporate Taxation. Chapter 4. Northampton, MA: Edward Elgar Publishing.