"The United States slashed its corporate rate from 35 per cent to 21 per cent on January 1. Meanwhile, over the past 15 or so years Australia has gone from having one of the lowest company rates in the OECD to one of the highest. The government's "enterprise tax plan" which seeks to lower the rate to 25 per cent over a decade has been meet with resistance from the Senate crossbench, and outright hostility from the Labor opposition..."

"...a recent empirical study by three German economists, published in the flagship American Economic Review, contains an ingenious way to get at the causal effect of company tax rates on wages. They utilise the fact that in Germany the company tax rate is determined in part by the federal government and in part by local government. This gave rise to a staggering 17,999 tax changes in 10,001 municipalities between 1993 and 2012..."

Just as importantly, the authors were also able to obtain administrative data on wages paid by employers. So rather than having a survey with dubious reliability, they know what workers at different employers in different municipalities actually got paid. Finally, because they have had so many local changes over two decades, they are able to factor out general economic trends over time, and other municipality-specific influences, and hone in on wage differences that are directly due to employers facing different tax rates.

The answer is that, on average, workers bear 51 per cent of the total company tax burden. And because of their worker-level data, the authors can speak to which workers are affected the most and hence the distributional consequences of company taxes.

They find that higher company taxes reduce wages most for the low-skilled, women, and younger workers. Overall, this implies that once the hit that workers take from company taxes is factored in, personal income-tax-systems in countries like Germany and the US are as much as 40 per cent less progressive than one would otherwise have concluded.

''...The striking implications of how high company taxes can undermine the progressivity of the income-tax-transfer system certainly apply to Australia, too...''

 ''...Cutting the Australian company tax rate from 30 per cent to 25 per cent is not just good for business, and workers. It is also helps to redress economic inequality. Surely this reform is something that deserves across-the-board political support when it comes before Parliament again this year...''

The author of the article: Richard Holden (professor of economics at UNSW Business School).
This article was originally published in the Australian Financial Review.