Incidence of corporate tax on wages and bargaining power

Abstract

Do wages respond to changes in the corporate tax under rent-sharing? If so, does the elasticity of wages to tax increase with workers’ bargaining power? This paper shows that, contrary to common intuition, these questions do not have a universal answer. Under Nash bargaining, wages do not respond to proportional corporate tax unless there are untaxed revenues. Under Kalai bargaining, wages respond to tax, but the relationship between elasticity and bargaining power is hump-shaped. This occurs because higher bargaining power not only increases the wage response to tax given pre-tax profits, but also amplifies the wage response to pre-tax profits.