This paper has started from the observation that there are substantial and persistent di¤erences in the ways OECD countries have adjusted their relative reliance on
cor-26The e¤ective average tax rate, developed by Devereux and Gri¢ th (2003), is equivalent to a weighted average of the e¤ective marginal tax rate on an investment that just earns a net rate of return equal to the going interest rate, and the statutory tax rate. The weight of the statutory tax rate in this measure rises with the (assumed) pro…tability of the underlying investment project.
27The only qualitative di¤erence in results is that the coe¢ cient of the rest-of-the-world tax rate is insigni…cant in Table A.3. This is probably explained by the inconsistency between dependent variable, which is based on e¤ective tax rates, and the explanatory variable, which, for lack of data, is still based on statutory tax rates.
porate and wage taxation to the forces of globalization. For this purpose we have set up a simple model that allows us to derive rigorously a number of testable hypotheses relating the mix of corporate and wage taxation to several country-speci…c variables.
In a second step, we have tested the theoretical predictions using data from 23 OECD countries for the period 1980–2004.
Our theoretical and empirical analysis has isolated three important country-speci…c variables that shape the mix of pro…t and wage taxation in the OECD. First our theoretical analysis has shown that an increase in government consumption will lead to a more than proportional increase in the wage tax. The reasoning behind this result is that the excess burden of the capital tax rises more steeply than that of the wage tax, because the capital tax reduces not only the domestic capital stock but also wage income. Our empirical tests provide support for this hypothesis. Other things being equal, a rising share of government consumption in GDP will cause a country to increase its reliance on wage taxes, relative to the tax on corporate pro…ts. This o¤ers an explanation for why countries with a history of ‘big government’and long periods of social democratic rule nevertheless rely relatively more on the taxation of wages than their more market-oriented counterparts. From a policy reform perspective, this result implies that reducing government consumption is a highly e¤ective way of reducing the tax burden on the average wage earner.
The second main prediction of our theoretical analysis is that an increasing share of the income earned in multinational …rms will, other things being equal, lower the corporate income tax. Based on empirical evidence that multinationals are more prevalent in man-ufacturing as opposed to the service sector, we have proxied the share of multinationals in the economy by the ratio of value added in services relative to manufacturing. This proxy proved to have a robust and signi…cant e¤ect on the factor tax mix. Moreover, it outperforms traditional measures of openness, such as the index of capital account restrictions, when country …xed e¤ects are included in the regression analysis and the focus is thus on explaining the tax changes that occurred within a given country over time.
Third, and …nally, our theoretical analysis has shown that an increase in the wage share simultaneously changes the relative size of tax bases, but also the political in‡uence of di¤erent income groups. From a pure e¢ ciency (or optimal tax) perspective only
the …rst e¤ect should matter and the reliance on wage taxation should increase. Our empirical analysis yields the opposite result, however, indicating that changes in the economic importance of di¤erent groups have important repercussions on their political power and hence on the political economic equilibrium. These e¤ects clearly deserve further analysis in future work on the determinants of the structure of factor taxation.
Acknowledgements:We thank Tony Atkinson, Stefan Bach, Christian Bellak, Steve Bond, Lars-Erik Borge, Julia Darby, Mike Devereux, Dhammika Dharmapala, Vesa Kanniainen, Jarle Møen, Johannes Rincke, Erik Sørensen, Sven Stöwhase, Hannes Win-ner, Ian Wooton and seminar participants in Bergen, Glasgow, Munich and Oxford for many helpful comments and suggestions. (More than we could eventually accommo-date.) We also thank three anonymous referees for their constructive comments and the editors for their e¢ cient handling of our manuscript. Schjelderup acknowledges the hospitality of the Center of Economic Studies (CES) at the University of Munich and …nancial support from the Research Council of Norway. The views expressed in this paper are those of the authors and should not be interpreted as the views of the institutions with which they are a¢ liated.
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Appendix
Table A.1: Data sources and methods
Variable Source De…nition and methodology
Corporate Institute for Fiscal Statutory tax plus typical local taxes and other income tax Studies; World Tax surtaxes. Where multiple rates are available, the rate Database (Michigan) manufacturing rate is chosen.
Wage tax OECD Taxing Average tax wedge of manufacturing worker on
rate Wages average income. This includes personal income
taxes, employer and employee social security contributions and payroll taxes.
public con- OECD National Public consumption expenditure divided by GDP sumption/GDP Accounts
wages/GDP OECD Nat. Accounts, Gross wage bill divided by GDP OECD Econ. Outlook, (excluding income of self-employed and OECD Analyt. Database owner-managed …rms)
GDP in US-$ OECD National GDP in trillion US$, converted at purchasing
trillion Accounts power parity exchange rates
capital Comparative Index ranging from 0 (closed capital markets) to controls Welfare States 4 (open capital markets)
index Data Set
service/ OECD STAN Value added in the service sector divided by manufacturing (Structural Ana- value added in the manufacturing sector value-added lysis Database)
FDI stock IMF International Stock of foreign direct investment divided abroad/GDP Financial Statistics by GDP
rest-of-the-world tax data from World Tax Inverse distance-weighted average statutory average corporate DataBase (Michigan); corporate tax rate of 70 countries for which tax rate distance data from CEPII continuous data are available from 1980-2004,
(Paris) excluding left-hand side country
Notes: - IFS data available from: www.ifs.org.uk/publications.php?publication_id=3210 - All OECD data available from: new.sourceoecd.org
- World tax data base available from: www.bus.umich.edu/otpr/otpr/introduction.htm
- Distance data available from: www.cepii.fr/anglaisgraph/bdd/distances.htm
Full source: E. Huber, Ch. Ragin, J. D. Stephens, D. Brady, and J. Beck…eld, Comparative Welfare States Data Set, mimeo 2004. Original source of the measure: Quinn (1997).
Table A.2: Descriptive statistics
variable obser- mean median standard min. max.
vations deviation
corporate tax/wage tax 509 1.258 1.155 0.548 0.272 3.745 public consumption/GDP 509 0.196 0.193 0.037 0.120 0.299
wages/GDP 470 0.420 0.423 0.057 0.225 0.536
GDP in US-$ trillion 509 0.813 0.205 1.592 0.005 11.657 capital controls index 308 3.471 3.500 0.588 2.000 4.000 FDI stock abroad 382 0.301 0.031 2.466 0.000 32.695 service/manufacturing VA 390 4.028 3.702 1.595 1.886 11.825 ROW average tax rate 451 0.355 0.341 0.041 0.285 0.441
Table A.3. Sensitivity analysis: E¤ective average tax rates (EATR)
dependent (1) (2) (3) (4) (5)
variable EATR /wage tax
country e¤ects p p p p p
year e¤ects p p p p
— public consump- -5.785 -5.341 -5.029 -7.632 -7.284 tion/GDP (1.198) (1.237) (1.303) (1.258) (1.172)
wages/GDP 1.695 1.741 3.325 1.921 1.532
(0.749) (0.741) (0.768) (0.584) (0.585)
GDP in US-$ 0.013 0.037 0.025 -0.014 -0.010
trillion (0.014) (0.012) (0.014) (0.015) (0.014)
capital controls 0.0035
index (0.050)
FDI stock 0.097
abroad/GDP (0.058)
service/manu- 0.266 0.259
facturing VA (0.034) (0.032)
ROW average 0.077
corporate tax rate (0.762)
time trend -0.032
(0.006)
observations 389 260 334 300 289
R-squaredy 0.86 0.92 0.86 0.90 0.92
R-squaredz 0.34 0.42 0.49 0.56 0.59
Notes: Robust (Huber-White) standard errors in parentheses.
Stars indicate level of signi…cance ( : 10%; : 5%; : 1%).
y: including time and country e¤ects (where they are in the regression) z: excluding time and country e¤ects