Other things being equal, a tax on corporate profits should hit shareholders—a group wealthier than the population as a whole—by shrinking the money available for dividend payments or reducing share values. But other things are never equal. Firms invariably respond to new taxes in order to minimise their costs. Depending on precisely how they seek to escape the tax, some of its burden may be passed on to others.
Mr Harberger’s model made a number of simplifying assumptions, however. He assumed, for instance, that markets were perfectly competitive. In practice, firms may enjoy market power over either workers or consumers . Perhaps most important, Mr Harberger assumed that the economy in question was closed. In practice, capital is relatively mobile across national borders—and intangible forms, like intellectual property, extremely so—while other factors of production like labour are not.
The size of an economy and its openness to capital flows are just two of the five factors that most influence an economic model’s conclusions regarding the incidence of corporate-tax changes, argued Jennifer Gravelle Stratton, then of the Congressional Budget Office, in a paper published in 2013. Another factor is how seamlessly production may be moved abroad in response to tax changes.
Sorting out the likely effects of a corporate-tax change, in other words, is complicated and messy. Empirical studies demonstrate exactly that. A paper published in 2015 by Kevin Hassett, later a chairman of President Donald Trump’s Council of Economic Advisers, and Aparna Mathur of the American Enterprise Institute, a think-tank, concluded that a 1% rise in the corporate-tax rate is associated with a 0.
Context, however, is subject to change. Reducing differences in corporate-tax rates across countries gives companies less scope to pass the tax burden on to workers by shifting production abroad. The Biden administration’s proposal for a global minimum rate is in large part targeted at firms that use accounting tricks to book profits in tax havens. Yet it should also deter governments’ efforts to lure production by undercutting other countries’ tax rates.