A Simulation Analysis of the Incidence of Corporate Income Tax

The incidence of corporate income tax is both an old and a new problem in public economics. In this paper, we utilize the dynamic general equilibrium model to analyze the incidence of the burden of corporate income tax and explain the intertemporal incidence. By building a dynamic macroeconomic model, we are able to analyze not only the instantaneous incidence of corporate income tax but also consider the intertemporal incidence. This dynamic macroeconomic model includes households’ maximization of lifetime utility and firms’ profit maximization.

We implement a simulation based on the dynamic macroeconomic model with plausible parameters, and measure the incidence of corporate income tax on labor income.

In the short run (for the first year), the incidence on labor income is approximately 10-20% and roughly 80-90% on capital income. In the long run, however, the burden borne by labor income gradually increases to 100%.