The Incidence of the Corporate Income Tax is Irrelevant for its (Benefit-Based) Justification
Robust support for corporate income taxation is a puzzle for standard tax theory because the tax’s incidence is uncertain and unreliable. We propose a resolution: if the corporate tax is seen as a benefit-based tax, its normative appeal depends on the correspondence between its incidence and that of the benefit which corporations derive from the state’s activities. We show that a simple mechanism makes this correspondence exact—and the net incidence of the tax zero—when the tax base matches what we call the benefit base. As a result, the appeal of the corporate income tax is independent of incidence as conventionally understood.
The authors wish to thank Alan Auerbach, Eric Bond, Mihir Desai, Dhammika Dharmapala, Louis Kaplow, Andreas Peichl, and participants at the National Tax Association’s 113th Annual Conference on Taxation, the 77th Annual Congress of the International Institute of Public Finance, and the International Economic Association’s Roundtable on “The Economics and Economic Policy of Corporation Tax” for helpful comments and discussion. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.