Rethinking the Corporate Income Tax: The Role of Rent Sharing

Standard analysis of the corporate income tax assumes shareholders bear the burden of taxes on excess returns. But evidence shows that firms share rents with workers, especially high-income workers, which implies that these workers bear some of the burden as well. Using the Tax Policy Center microsimulation model, we show that, relative to standard assumptions, allowing for rent sharing with high-income workers consistent with recent studies changes the incidence of the tax – labor bears more of the burden – but the tax remains highly progressive. We discuss several implications of the results and directions for future research.