From Alison Felix and Jim Hines:
This paper evaluates the effect of U.S. state corporate income taxes on union wages. American workers who belong to unions are paid more than their non-union counterparts, and this difference is greater in low-tax locations, reflecting that unions and employers share tax savings associated with low tax rates. In 2000 the difference between average union and non-union hourly wages was $1.88 greater in states with corporate tax rates below four percent than in states with tax rates of nine percent and above. Controlling for observable worker characteristics, a one percent lower state tax rate is associated with a 0.36 percent higher union wage premium, suggesting that workers in a fully unionized firm capture roughly 54 percent of the benefits of low tax rates.
High corporate income taxes reduce the after-tax profits of firms earning rents, which are the same firms that are in positions to pay above-market wages to their employees. Since high taxes mean that there is less for everyone, it can hardly be surprising that high taxes ultimately depress union wages, particularly in capital-intensive industries where corporate taxes have the most impact on a firm’s bottom line.
The evidence that high tax rates reduce union wage premiums does not directly address the impact of corporate taxes on wages for the majority of U.S. workers who are not union members. In the case of perfectly competitive labor markets, the incidence of the corporate tax depends on how the tax affects demand for labor, which in turn is a function of the effects of taxation on labor-capital substitution and the reallocation of economic activity between sectors of the economy. But to the extent that there is a rent-sharing aspect of wages in settings without labor unions, it may be reasonable to expect that the same dynamics would appear, in that higher taxes would be associated with reduced wages. A similar process could apply to executive compensation, rent and royalty payments, and any other firm expenses that plausibly include sharing of economic rents. Consequently, the inframarginal burden of the corporate income tax may be shared among a number of a corporation’s stakeholders, thereby distributing corporate tax burdens among the parties who normally benefit from surplus produced within the firm.