Ruhr Economic Papers

Ruhr Economic Papers #532

Do Wages Rise when Corporate Taxes Fall? Evidence from Germany’s Tax Reform 2000

by Nils aus dem Moore, Tanja Kasten and Christoph M. Schmidt

RWI, RUB, 12/2014, 37 S./p., 8 Euro, ISBN 978-3-86788-609-3 DOI: 10.4419/86788609

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Abstract

We contribute to the empirical literature on the effective incidence of corporate income taxation by using the German Business Tax Reform of the year 2000 (GBTR 2000) as a natural experiment. Its effect on wages in the manufacturing sector is identified by means of a difference-in-differences analysis that uses French firms as comparison group. We provide evidence that GBTR 2000 led to a significant and sizeable wage effect. For 2001, the first year after GBTR 2000 took effect, we estimate a short-run effect that implies a wage increase of 7.9 percent. Due to the dynamic nature of the empirical model used, the incidence effect grows gradually over time during the evaluation period.

JEL-Classification: H22, H25, J31, J38

Keywords: Corporate income taxation; tax reform; tax incidence; profit taxation; wages; difference-in-differences

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