A spatial model of corporate tax incidence

Kevin Hassett and Aparna Mathur

Applied Economics, 2015, vol. 47, issue 13, 1350-1365

Abstract: Using a unique, self-compiled data-set on international tax rates, we explore the link between taxes and manufacturing wages for a panel of 66 countries over 25years. We find, controlling for other macroeconomic variables, that wages are significantly responsive to corporate taxation. Higher corporate tax rates depress wages. Using spatial modelling techniques, we also find that tax characteristics of neighbouring countries, whether geographic or economic, have a significant effect on domestic wages. We test for, and reject, spatial autocorrelation in our model using a modification of the Moran-I test statistic that accounts for country-specific fixed effects in a panel data setting. Our article fits in with the new economic geography literature as well as the urban economics literature which attempt to explain the spatial distribution of wages.

Date: 2015
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DOI: 10.1080/00036846.2014.995367

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