Who really pays when giants pay less: the contested arithmetic of tax incidence

When multinationals, private equity and wealthy owners pay less tax, the shortfall does not disappear. Someone else carries it. The economists' name for the question is tax incidence: who actually bears the burden of a tax, as opposed to who formally hands over the cheque. The honest answer is that this is genuinely contested, and the contest matters, so we set out the real disagreement rather than pick the figure that suits the argument. What is far less contested is the direction of the pressure, and that is where this site's whole case finally lands.

Why this is a real debate, not a settled number

Ask who bears the cost of corporate tax and serious economists give materially different answers, because they are modelling different things. We will not flatten that. Here is the genuine spread.

The view that labour bears much of it. In a small open economy where capital can move freely, the IFS Mirrlees Review concludes that shareholders are largely unaffected by a source-based corporate tax, because they simply shift capital to wherever after-tax returns are highest. The burden then falls on immobile domestic workers, through lower wages, because less capital per worker means lower productivity. On this model, corporate tax acts, paradoxically, as a roundabout tax on labour. The OECD has repeatedly judged corporate tax the most damaging tax for growth, and some IMF researchers argue that workers, not shareholders, bear its real incidence; across the literature, estimates of the share borne by workers span a very wide range.

The empirical results in this camp:

• Fuest, Peichl and Siegloch, in the American Economic Review (2018), found that workers bear about half of the total corporate tax burden, with roughly £0.65 of every £1 of corporate tax passed through to lower wages, and the effect falling hardest on low-skilled workers, women and the young.
• Arulampalam, Devereux and Maffini (Oxford, 2012), using German municipal business-tax data, found a 10% rise in the effective marginal tax rate cut wages by about 1.8%, mostly hitting incumbent workers with limited bargaining power.
• Baker, Sun and Yannelis (presented to the American Economic Association in 2024) found, using linked retail price and firm data, that consumers bear a large share: about 52% in their base case (a range of roughly 43% to 52% across specifications), with workers about 28% and shareholders about 20%.

The view that capital bears most of it. Prime Economics, in work by John Weeks (2023), disputes the labour-incidence story as misleading, arguing that the mechanisms by which firms would pass the tax to workers do not actually operate in practice. On this view, corporate tax mostly reduces retained earnings and dividends, falling on shareholders, who are heavily concentrated in the top of the income distribution; the IFS itself, in an electoral context, described a corporate tax rise as "clearly progressive".

The honest synthesis. A 2021 National Bureau of Economic Research paper found the uncertainty genuinely large: empirical estimates of how a 1% rise in the corporate tax rate moves wages range from 0% to minus 0.6%, implying labour could bear anywhere from 0% to more than 100% of the burden. The official bodies disagree too: the US Congressional Budget Office assigns 25% to workers (it moved from 100% to capital in 2012), the US Treasury assigns 18% to workers, and the Joint Committee on Taxation assigns 100% to capital in the short run. Across the institutions, a reasonable middle is roughly: labour 25% to 50%, consumers 25% to 50%, capital 20% to 30%, with the split shifting by industry, country size, capital mobility and time horizon. We present that as a range, because that is what the evidence is.

What is much less contested: the direction of the pressure

Step back from the precise split and a clearer pattern holds. Whoever ultimately bears corporate tax, it is not the same people who capture the benefit of avoiding it.

Profit shifting has a measured fiscal cost. The OECD puts the global revenue loss at USD 100 to 240 billion a year, 4 to 10% of all corporate tax collected; the Tax Justice Network estimates around 36% of multinational profits are shifted to havens, costing about USD 245 billion a year in its original estimate (later editions are higher). The question is what governments do about the hole. Research published through CEPR in 2023 tested exactly this and found that "countries with high revenue losses due to profit shifting have lower corporate tax revenues and rates and higher indirect tax revenues and rates". That is the fiscal substitution mechanism: faced with a profit-shifting shortfall, governments lean on VAT, GST and other consumption taxes, which are regressive, because they take a larger share of income from people who spend most of what they earn. Profit shifting by mobile capital thus pushes the whole tax system toward a more regressive shape.

Domestic small firms sit on the wrong side of this directly. A Belgian study using confidential tax-return data found domestic SMEs face, on average, an effective tax rate 1.6 percentage points higher than large domestic firms, and 4.8 percentage points higher than large multinationals, with the tax breaks available to small firms too small to close the gap. And the corrosion is not only fiscal: the Australian tax office notes that when taxpayers watch multinationals legally avoid tax, it "weakens voluntary compliance by all taxpayers," eroding the consent the whole system runs on.

A fair caution belongs here. The UK tax gap hit a record £46.8 billion in 2023-24, and small businesses account for around 60% of it; the Corporation Tax gap rose to 15.8% of liabilities, around £18.6 billion, roughly 40% of the total gap. But that small-business shortfall is mostly error and informal non-compliance, not the engineered, cross-border structuring available to large multinationals and private equity. The two are different problems, and we do not pretend the small-business gap is innocent. It is, however, a different thing from the structural avoidance this site documents.

The payoff

Here is where the arithmetic of the whole site lands. When mobile capital pays less, governments face a binary choice: raise other taxes or cut spending. IMF research found that fiscal consolidations significantly increase inequality, reduce the labour share of income and raise long-term unemployment, with the Gini measure of inequality rising about 3.5% over the longer term. The UK's austerity from 2010 fell hardest on women, racially minoritised communities and the poorest households. And the IPPR Commission on Economic Justice found in 2018 that UK business taxation had shifted the burden away from profitable but low-employment firms toward businesses with more staff but lower profits, the reverse of a fair system.

So the bottom line is not a slogan; it is a direction, supported by the evidence even where the precise split is not. Corporate tax avoidance by mobile capital is not fiscally neutral. The revenue-raising burden shifts toward consumption taxes that are regressive, toward labour, and toward the domestic small firms who have no avoidance options, while the public services squeezed to balance the books are the ones lower-income households rely on most. The people who capture the benefit of the avoidance and the people who end up paying for it are, to a very large degree, not the same people. That is the case. The numbers, not the outrage, make it.