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(1

An Empirical Analysis of the Incidence of Corporate Income Tax
in Ghana (1997-200!

&sei-+aw ,ran-
1
Desmond .utu /0entimi
2 1

1. Elubo) ". & bo2 %() Elubo) 3estern 4egion) 56ana
2. ,acult0 of Economics and 7usiness /dministration) 8at6olic 9niversit0 8ollege of 56ana ".&. bo2
*:*) Sun0ani) ,iapre
1Email of t6e corresponding aut6or; a0entimitutu<0a6oo.com
A"stract
.6e corporate income ta2 is levied on earnings at t6e corporate level and s6are6olders pa0 ta2es again on t6ese
earnings w6en t6e0 are paid out as dividends. .6is double ta2ation 6as been a concern of polic0 ma-ers and its
effects on economies 6ave been anal0=ed and discussed b0 researc6ers in man0 disciplines. .6is stud0 uses a
financial statement data from ten !1# manufacturing companies listed on t6e 56ana Stoc- E2c6ange over a ten
0ear period spanning from 1>>7 to 2:. .6e simple ordinar0 least s?uares regression is used for models
representing eac6 of t6e t6ree pla0ers over time. .6e results s6owed a negative relations6ip between returns to
s6are6olders and t6e ta2) indicating t6at returns decrease w6en t6e ta2 increases. .6e results also s6owed a
negative relations6ip between t6e cost of labour and t6e ta2) indicating t6at an increase in t6e ta2 will lead to a
decrease in t6e cost of labour !wages#. ,inall0) t6e results s6owed a significant positive relations6ip between
t6e gross profit percentage and t6e ta2@ indicating t6at consumer prices ma0 increase in relation to an increase
in t6e ta2 rate.
#ey $ords; 8orporate Income .a2) Incidence of ta2) 4egression anal0sis) 56ana
1% Introd&ction
.6e incidence of corporate ta2es 6as been t6e focal point of intense stud0 since it was introduced in 1>>. Aan0
economists 6ave anal0=ed t6e incidence of t6e corporate ta2 b0 using emerging regression tec6ni?ues) but t6e
findings of t6eir studies 0ielded conflicting results. 3it6 t6e most prolific publication of /rnold BarbergerCs
stud0 in 1>:2) t6e general e?uilibrium model became t6e overriding met6od of anal0sis) and a consensus
emerged t6at muc6 of t6e burden of t6e corporate ta2 was borne b0 capital in a closed econom0) w6ere none of
t6e economic sectors were involved in trade wit6 ot6er countries. /s economies became globali=ed) concerns
about w6et6er suc6 conclusion drawn b0 Barberger and ot6ers still 6olds wit6in a large open econom0 6as
spurred new t0pes of anal0sis in t6is area !Barberger) 1>:2#.
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Some countries of w6ic6 56ana is not e2ception) address t6eir fiscal deficit b0 increasing ta2 revenues rat6er
t6an reduction in government e2penditures. Nevert6eless) polic0 ma-ers most often lose sig6t of t6e incidence of
t6ese new ta2es !+ounger) 1>>*#. Studies in areas li-e public sector economics and ta2ation are 0et to resolve
t6e controversies surrounding t6e issue of w6o bears t6e burden of ta2es on corporate income. Economists
recogni=e t6at t6e incidence t6at is t6e distribution of t6e burden of suc6 ta2ation falls ultimatel0 on individuals
and not on corporations !4ogers) 1>>:#. Bowever) some economists argue about w6o bears t6e largest burden. In
determining t6e economic effects of t6e corporate income ta2) it is crucial to understand t6e mec6anisms b0
w6ic6 ta2 burden are transferred. .6e incidence of t6e corporate ta2 is also an important factor in ascertaining
t6e effects of ta2 proposals on different segments of t6e population. Economists are far from a consensus about
t6e proportional distribution of t6e corporate income ta2 burden. It is t6erefore relevant to do an empirical
anal0sis of t6e incidence of corporate income ta2 in 56ana.
2.1 Literature Review
/ series of studies using econometric time series data to address t6e s6ifting of t6e corporate income ta2 were
done in t6e mid-si2ties to t6e earl0 seventies. .6ose studies used aggregate measures from t6e manufacturing
sector wit6 predominantl0 corporate firms. .6ese papers can basicall0 be put into four groups based on t6e
model used for t6e regression; a corporate returns model) a mar--up pricing model and production function
model. / more recent model called t6e bargaining model 6as been developed and used to anal0=e t6e incidence
of corporate ta2 b0 /rulampalam et al., !211#@ /lison and Bines !2>#.
In 1>:*) Dr=0=ania- and Ausgrave started t6is line of researc6 and reported in t6eir findings t6at corporate
capital owners s6ift more t6an 1E of t6e corporate ta2. .6e mec6anism of s6ifting) forward to consumers or
bac-ward to labour) was not addressed in t6eir stud0. .6e purpose of t6eir stud0 was to determine t6e effect of
t6e ta2 variable on corporate returns w6ile 6olding all ot6er factors constant. Different rate of return variables
suc6 as return on e?uit0) return on total capital and t6e effective ta2 rate were used in t6e model and t6e
t6eoretical reasons for t6eir structure were discussed b0 t6e aut6ors. F.6e anal0sis of t6is stud0 ta-es an
empirical approac6) wit6out a priori assumptions about t6e mar-et structureG !Dr=0=ania- and Ausgrave) 1>:*)
p.(#. .6e additional variables included in t6e stud0 were t6e c6ange in consumption) e2penditures lagged one
0ear) t6e inventor0 to sales ratio for all manufacturing lagged one 0ear) and ot6er ta2 rates were defined as t6e
ratio of 0ield from ot6er ta2es to 5N" !Dr=0=ania- and Ausgrave 1>:() *1#.
.6e stud0 reported results from t6e regression model for all manufacturing and various industries. .6e results of
t6e stud0 indicated t6at) in most samples) s6ifting of over 1E occurred. .6e results range from 1%7E s6ifting
for a group of steel companies to 21E for a group of te2tile companies. Several ot6er studies were written to
critici=e Dr=0=ania--AusgraveCs stud0 suc6 as !Slitor) 1>::@ 5oode) 1>::@ and 8ragg et al., 1>:7#. ,or instance
Slitor praises Dr=0=ania- and Ausgrave for ma-ing an important new step in t6is area of public finance !Slitor)
1>::) p.1(7#. Bowever) 6e warns t6at t6e results of t6e stud0 cannot be accepted wit6out e2tensive e2amination
because t6e results collide wit6 accepted t6eor0 in incidence) profit-ma2imi=ing) and barriers to sweeping price
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c6anges !Slitor) 1>::) p.1(:#. In order to test t6e model) Slitor introduced anot6er independent variable 6e calls
an Heconomic pressure variable.H .6e pro20 c6osen b0 Slitor to represent economic pressure is a capacit0
utili=ation variable.
8apacit0 utili=ation is a measure of actual production divided b0 production capacit0. 36en t6is new variable is
substituted for t6e consumption variable) s6ifting was reduced from 1(1 to $7 percent) but t6e new pressure
variable and t6e inventor0-sales ratio were insignificant. Slitor tried wit6 various ot6er regressions and in eac6
case t6e s6ifting measured was reduced from Dr=0=ania- and AusgraveIs results) but not b0 as muc6 as t6e
replacement of t6e consumption variable. Slitor did not claim to 6ave measured t6e s6ifting more accuratel0 but
6is purpose was merel0 to establis6 t6at t6e researc6 of Dr=0=ania- and Ausgrave is flawed. 5oode !1>::#
criti?ues Dr=0=ania- and Ausgrave but did not provide empirical evidence to Justif0 6is obJections to t6eir stud0.
Be concluded t6at t6e t6eor0) model) and data are seriousl0 flawed and 6ence reJects Dr=0=ania- and Ausgrave
conclusions.
8ragg et al., !1>:7# also critici=ed Dr=0=ania- and AusgraveIs conclusions and made adJustments to t6e model
to demonstrate its sensitivit0. In t6eir adJustment) t6e0 first added a variable to represent t6e c0clical nature of
t6e econom0 w6ic6 8ragg et al. believe is related to t6e ta2 effect. .6e0 e2plained t6at t6e increase in returns
attributed to t6e ta2 variable b0 Dr=0=ania- and Ausgrave is in fact caused b0 t6e c0clical nature of t6e
econom0. .6e pro20 c6osen b0 8ragg et al. to represent t6e c0cle of t6e econom0 is t6e unemplo0ment rate.
36en t6e unemplo0ment variable was added to Dr=0=ania- and Ausgrave model) t6e s6ifting coefficient drops
from 1%1E to 12E. Notwit6standing t6is adJustment) 8ragg et al. suggested t6at 6ig6 profits and ta2es caused
b0 t6e war and mobili=ation 0ears distorted t6e relations6ips in t6e regression and added a dumm0 variable to t6e
model for t6ese 0ears. 36en t6is dumm0 variable was added to t6eir e2tended model) t6e s6ifting coefficient of
t6e ta2 variable dropped to :E and became statisticall0 insignificant. 7ased on t6e findings of t6eir new model)
8ragg et al., !1>:7# concluded t6at s6ifting does not ta-e place and capital bears t6e burden of t6e ta2.
/not6er stream of researc6 instigated b0 Ball !1>:(#) 6e empiricall0 e2amines t6e ?uestion of s6ort-run
incidence of t6e corporate income ta2 using a long-run production function model. .6e met6od Ball used in t6e
stud0 was to run regressions of different production functions based on no s6ifting) full s6ifting t6roug6 wages)
and full s6ifting t6roug6 prices. Ball assumed t6at t6e tec6nical gains e2perienced in t6e econom0 were neutral
between labour and capital. In ot6er words) labour and capital s6are an e?ual portion of t6e tec6nical gains. Ball
!1>:() p. 2:%# concluded t6at t6ere was no s6ifting because t6e no-s6ift regression wit6 an 4
2
of .>71% as
compared to .>(*2 for consumer s6ifting and .>*$ for labour s6ifting. .6e stud0 did not offer an0 met6od of
measuring partial s6ifting. .ure- !1>7# e2tended BallIs approac6 b0 allowing tec6nical gains for labour and
capital to var0 separatel0. .ure- used aggregate data from t6e manufacturing sector for t6e 0ears 1>*%-1>:%. Ber
results corroborate t6ose of Ball in finding evidence of no s6ifting. &a-land !1>72# designed a production
function model based on profit ma2imi=ation be6aviour to test for t6e fitness of t6e model to manufacturing time
series data. Be added a ta2 variable to test for ta2 s6ifting. .6e model used returns to capital as t6e dependent
variable and measured t6e effects of marginal productivit0 and s6ort-run fluctuations in output. &a-land
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concluded t6at t6e model best e2plains t6e time pat6 of manufacturing returns ?uite well) and all t6e variables
are significant wit6 t6e e2pected sign e2cept t6e ta2 variable. .6is indicates t6at t6e corporate income ta2 is not
s6ifted in t6e s6ort run.
Dusans-0 !1>72) p. *%7# provided a si2teen e?uation model w6ic6 included t6e nature of t6e corporate income
ta2 burden) t6e return to capital) t6e level of inventories and sales) t6e determination of labour input) t6e
pa0ments to labour) and t6e price level) among ot6er economic variables. /llowance is made for various firm
be6aviours to e2ist. .6e model allows firms to 6ave a profit goal) an inventor0 goal) and or a sales effectiveness
goal. .6e two stage least s?uares met6od was used to simultaneousl0 estimate t6e relations6ips of t6e variables
in t6e model. ,inall0) t6e model resulted in four statisticall0 significant variables including t6e ta2 variable. .6is
e2tensive model developed b0 Dusans-0) w6ic6 accounts for man0 aspects of t6e economic environment in a
simultaneous manner) results in s6ifting estimates of about 1E.
/mong t6e recent empirical studies on t6e incidence of t6e corporate income ta2 are two studies underta-en b0
/rulampalam et al., !211# and /lison and Bines !2>#. .6ese studies 6ave ta-en a decidedl0 different
approac6. .6e studies adopted a bargaining model approac6 to determining ta2 incidence) assuming t6at
bargaining between t6e firm and t6e emplo0ees determines wages. .6at approac6 suggests t6at corporate ta2es
could affect wages b0 a mec6anism ot6er t6an t6e general e?uilibrium forces on t6e demand and suppl0 of
labour and capital.

'% (ethodolo)y
3.1 Model specification
Capacity *tili+ation; .6is variable was introduced b0 Slitor !1>::# as anot6er independent variable. Be calls it
an Heconomic pressure variable.H .6e pro20 c6osen b0 Slitor to represent t6e economic pressure is a capacit0
utili=ation variable. 8apacit0 utili=ation represents t6e value added in manufacturing measured as a percentage of
gross domestic products !E of 5D"#. .6is is introduced to absorb t6e economic pressures e2erted on t6e
manufacturing firms. .6e CA, variable w6ic6 is calculated as t6e ratio of fi2ed asset to total asset was used as a
pro20 for tec6nological advancement. It is ?uite obvious t6at tec6nolog0 will pla0 a -e0 role w6en it comes to
cost of production b0 corporate firms. .6is factor is difficult to measure and no consensus 6as been reac6ed in
t6e literature for a perfect variable to represent t6e effect. .6e 8/" variable is included in t6e model as an
imperfect pro20 for t6ese tec6nological advances.
Gross ,rofit (G, -!. .6e gross price is used as a dependent variable to measure t6e impact of t6e corporate
income ta2 on t6e prices t6at consumers pa0 for a particular corporate good. If t6e ta2 burden is indeed s6ifted to
consumers) t6en t6e a priori e2pectation for ta2 elasticit0 would be positivel0 related to t6e gross price
percentage. .6e Corporate /et&rns (/ET! variable represents t6e return s6are6olders gain on t6eir investment.
Just as t6eor0 ec6oes and furt6er emp6asi=es t6at t6e corporate income ta2es are born b0 owners of capital) t6e
impact of t6e burden would reflect on t6eir investment t6roug6 t6e returns t6e0 ma-e at t6e end of t6e period.
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If indeed t6e ta2 is born b0 capital owners) t6en t6e effect of t6e ta2 would 6ave a negative relations6ip between
t6e corporate ta2 and t6e returns on s6are6oldersC investment as seconded b0 economic t6eor0. 0a"o&r (0A1! is
measured as t6e total labour force measure in 0ear 2 prices. .6e purpose is to control for t6e effect of firm
growt6 or e2pansion. .6us) t6e c6ange in labour costs produced b0 c6anges in ta2 burden will be independent of
growt6 factors of t6e firm. *nexpected Earnin)s (*E! will be determined b0 t6e current earnings against prior
0ear earnings and t6e simple c6ange in earnings from t6e prior 0ear to t6e current 0ear. *nemployment (*/! as
defined b0 t6e 7ureau of Kabour Statistics) are people w6o do not 6ave a Job) but 6ave activel0 loo-ed for one
for t6e past four wee-s) and are currentl0 available for wor-. .6is variable was introduced b0 8ragg et al.,
!1>:7# to represent t6e c0clical nature of t6e econom0 in t6e model. Cons&mer ,rice Index (C,I!2 measures
c6anges over time in t6e general price level of goods and services t6at 6ouse6olds ac?uire for t6e purpose of
consumption. .6is variable will be a good determinant of t6e actual impact of t6e corporate income ta2 on t6e
lives of t6e average population. (ar3et /et&rn ((#T#; .6e mar-et return variable is included in t6e model
to 6old constant t6e effects of overall mar-et activit0 on returns. .6e variable is constructed b0 compounding t6e
twelve mont6l0 returns ending wit6 t6e firmIs fiscal 0ear reported in t6e financial reports of t6e firms. .6e
mar-et return used in t6is stud0 is an e?uall0 weig6ted average for dividend of all t6e ten companies combined.
3.2 Specification of the Financial Models
.6is section of t6e paper discusses t6e financial models used in t6e ordinar0 least s?uare !&KS# regression. /s
emp6aticall0 stated in t6e literature above) t6e burden of t6e corporate income ta2 6as been t6eori=ed to fall on
owners of capital and to some e2tent on consumers) or labour. 70 measuring t6e magnitude or e2tent to w6ic6
t6e ta2 burden is empiricall0 s6ifted) models were constructed to be incorporated into statistical anal0sis using
data from t6e targeted firms. E2tensive studies on ta2 incidence using t6e corporate returns model are available
to provide resourceful assistance in t6e construction of t6e model to measure t6e ta2 burden for owners of
capital. Aodels for measuring t6e effects of t6e ta2 on consumers and labour are not readil0 available in t6e
researc6 literature. .6erefore t6ese models would be constructed using personal intuition and understanding of
t6e variables t6at affect pricing of consumer goods and labour costs.
3.3 Tax Burden on Capital
8apital owners would suffer for t6e ta2 incidence t6roug6 a reduction in returns on t6eir investment. .6e model
to represent t6e return is;
4E.
t
L f !./M) AD.) 9E#
4E.
t
L N

O N
1
./M
t
O N
2
AD.
t
O N
*
9E
t
O e
t
------ !*.1#
4here. /ET
t
L .6e annual return on e?uit0 or stoc- mar-et return for 0ear t) measured as
a c6ange in t6e stoc- price divided b0 t6e stoc- price at t6e beginning of t6e 0ear. TA5
t
6 4epresents t6e
corporate ta2 rate for 0ear t and is measured as t6e actual ta2 paid divided b0 t6e proposed ta2 for 0ear t. (#T
t

L .6e mar-et return for 0ear t) measured as t6e annual dividend for 0ear t. *E
t
L .6e une2pected earnings for
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0ear t) measured as t6e difference between t6e ratio of earnings before interest and ta2 !E7I.# to t6e number of
s6ares issued in t6e current 0ear and t6e previous 0ear. /nd e
t 6
t6e stoc6astic error term.
/s ec6oed earlier on in t6e stud0) t6e s6are6olders burden of t6e corporate ta2 will be reflected t6roug6 lower
returns on t6eir investment. In an efficient mar-et) t6e price of t6e stoc- must reflect all available information.
/n increase or decrease in t6e ta2 rate s6ould cause a decrease or a corresponding increase in returns. If an0 of
t6e ta2 burden is borne b0 capital owners) t6en estimation of t6e parameters of t6e models s6ould result in a
negative coefficient for t6e corporate ta2 variable in t6e returns model. .6eor0 admits t6at some of t6e burden
will be borne b0 s6are6olders. If t6at is t6e case) t6en t6e first 60pot6esis in t6e alternative form is; 7
l
.6e
coefficient for t6e ta2 variable in t6e returns model is different from =ero !N
1
P #.
3. Tax Burden on Consu!er
.6e effect of t6e ta2 burden on consumers would ta-e t6e form of 6ig6er prices for t6e goods produced.
.6erefore t6e model below is used to represent t6e price effect on consumers;
5"E L f !./M) 8"9) 8"I#
5"E L N

ON
1
./M
t
O N
2
8"9
t
O N
*
8"I
t
O e
t
--------------- !*.2#
36ere;
G, t -
t
L t6e gross profit divided b0 sales for 0ear t@ TA5
t
L t6e effective ta2 rate for 0ear t as defined above in
t6e corporate return model@ C,*
t
L firmCs capacit0 utili=ation for 0ear t@ used as a pro20 for economic pressure.
C,I
t
L t6e consumer price inde2 for 0ear t) and e
t
L Error term for 0ear t.
If t6e firm s6ifts an0 of t6e ta2 burden to consumers) t6e sales price of t6e goods will be e2pected to increase
w6en t6e ta2 is increased assuming t6ere was no corresponding increase in t6e cost of t6e goods sold. Impl0ing
t6at) t6e gross profit percentage would increase to include t6e mar-up of t6e ta2. Earlier empirical studies on
s6ifting to consumers were critici=ed for not including t6e effect of business c0cles in t6e model !7allentine
1>$) p.1*-1(#. .6e capacit0 utili=ation and consumer price inde2 variables will be assumed to 6old constant t6e
effects of all economic conditions. /s e2plained earlier in t6e stud0) capacit0 utili=ation represents t6e actual
production divided b0 production possible at full capacit0 for instance t6is stud0 used t6e contribution of t6e
manufacturing sector as a percentage of t6e gross domestic product !5D"# as a pro20 for capacit0 utili=ation. If
forward s6ifting of t6e corporate income ta2 to consumers occurs) a positive relations6ip s6ould be observed
between 5"E and t6e corporate ta2 variable. .6us) supporting t6e alternative 60pot6esis !7
1
! t6at t6e average
coefficient of t6e corporate ta2 variable in t6e consumer model is greater t6an =ero !N
1
P#.
3." Tax Burden on La#our
.6e burden of t6e corporate income ta2 ma0 be borne b0 labour t6roug6 reduced wage rates or labour 6ours)
resulting in a lower cost of labour to t6e firm. .6e model to represent t6e effect of t6e ta2 on labour is given as;
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K/7 L f !./M) 8/") 8"9) 94#
K/7t L N

O N
1
./M
t
O N
2
8/"
t
O N
*
8"9
t
O N
(
94
t
O e
t
----------- !*.*#
36ere;
K/7t L t6e total labour force using t6e 0ear 2 as a constant rate t) ./Mt L t6e effective ta2 rate for 0ear t as
defined in t6e previous models above. 8/"t L ,i2ed /ssets for 0ear t divided b0 .otal /ssets for 0ear t@ 8"9t L
t6e capacit0 utili=ation) representing t6e contribution of t6e manufacturing sector as a percentage of gross
domestic product !5D"#. 94t L t6e unemplo0ment rate for 0ear t@ and e
t
L error term for 0ear t.
.6e labour variable is used to control for t6e effect of firmsC growt6 or e2pansion. .6e alternative 60pot6esis
t6us 7
1.
t6e coefficient of t6e corporate ta2 variable in t6e labour model is less t6an =ero) t6us N
1
Q .
/ET
t
6 RStoc- "rice
t
-Stoc- "rice
t-1
O !DividendSNo. of S6ares#SS"
t-1
% TA5
t
6 Income .a2SE7I.
G/899 ,/8:IT- 6 (Sales T 8ost &f 5oods Sold#SSales% 0A18*/ 6 National data CA, 6 ,i2ed
/ssetS.otal /sset. Capacity *tili+ation 6 National data. *E
t
LE7I.
t
SNo. of S6ares for 0ear t T E7I.
t-1S
No. of
S6ares
t-1.
C,I 6 8onsumer "rice Inde2. */
t
6 9nemplo0ment 4ate for 0ear t.

3.$ Method of %ata &nal'sis
.6e earl0 empirical studies measuring t6e incidence of corporate income ta2 used aggregated data for t6e
manufacturing sector and run t6e anal0sis wit6 t6e ordinar0 least s?uares !&KS# regression. .6is stud0 uses
several 0ears of firmCs specific financial data for ten firms in t6e manufacturing sector of 56ana. 4egression
anal0sis) correlation coefficients) multicollinearit0 tests were used to anal0=e t6e data. Statistical "ac-age for
Social Sciences !S"SS# software and Aicrosoft E2cel were t6e ultimate software used for all t6e anal0sis.
;% <isc&ssion of /es&lts
.1 %escriptive Statistics of Corporate (nco!e Tax
.6e average rate for t6e corporate income ta2 variable is about 22.*E and seems fairl0 reasonable given t6e
range of marginal ta2 rates t6at appeared in t6e sample. Bowever t6e ma2imum observation for t6e corporate ta2
is *:.*E and t6e minimum is 7.>E. .6ese figures ma-e logical sense particularl0 in situations w6ere t6ere are
occurrences of large profits or losses respectivel0. Since ta2 laws do not remain stagnant but d0namic and varies
over time) t6e corporate ta2 rate is increased b0 1E in order to observe t6e effect of t6is marginal c6ange in t6e
corporate ta2 rate on t6e t6ree dependent variables. .6e mean value of corporate ta2) increased slig6tl0 from
22.*E to 22.%E as result of t6e adJustment in t6e corporate income ta2 rate. .6ere was a significant increase in
t6e ma2imum observation from *:.*E to *:.7E and conse?uentl0) t6e minimum observation also increased
from 7.>E to $.EE. .6ere was a clear indication t6at t6e average values of t6e corporate income ta2 varies
proportionall0 to t6e ta2 rate !see .able 1#.
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($


Corporate Tax /ate Ad=&sted Tax /ate
Aa2imum .*:* .*:7
Ainimum .7> .$
Aean .222> .22%2
Standard Deviation .>$2$ .>>*
1>>7 .2% .2%*
1>>$ .27% .27$
1>>> .*:* .*:7
2 .2( .2:
21 .*(2 .*(%
22 .2$> .2>2
2* .1>( .1>:
2( .7> .$
2% .>7 .>$
2: .1*: .1*7
Ta#le 1) %escriptive Statistics of Corporate Tax *aria#le







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>aria"les Capital (odel Cons&mer (odel 0a"o&r (odel

/ctual Data /dJusted Data /ctual Data /dJusted Data /ctual Data /dJusted Data
Intercepts 1>:%.2 1>::.$$ -7.71* -7.712 1>.>7 2.*2
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D3 .est 1.%* 1.%2$ 1.%2: 1.%* 2.(% 2.($
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Ta#le 2) +ara!eters fro! the raw data and with 1, upwards ad-ust!ent in the corporate tax for the co!#ined
Models
T&./ Tax0 M1T/Mar2et Return0 C+3 /Capacit' 3tili4ation of the fir!0 35/3nexpected 5arnin60 C+( /
Consu!er +rice (ndex0 C&+ /+rox' for Technolo6ical &dvance!ent0 3R /3ne!plo'!ent Rate0 %7 /%ur#in
7atson % Statistics0 8/8u!#er of 9#servation
.2 5!pirical Results for the Financial Models of the paper
.6e ordinar0 least s?uare !&KS# regressions are run at t6is point for eac6 of t6e t6ree financial models using
financial data from ten !1# listed manufacturing companies in 56ana. / furt6er modification in t6e corporate
ta2 rate was incorporated. .6e intention of t6is action was to determine t6e impact of c6anges in ta2 policies on
t6e various economic pla0ers) especiall0 t6e manufacturing firms. .6e results of t6e regressions using t6e
actual values of t6e corporate ta2 rate are compared to t6e results of t6e adJusted ta2 values in t6e anal0sis. .6e
capital return model represents t6e corporate income ta2 burden on s6are6olders. .6e average coefficients for
!AD.#) t6e pro20 for t6e mar-et returns is !-.$*# from t6e regression but t6is is statisticall0 not significant
wit6in t6e 1 to 1 percent level of confidence. .6e negativit0 of t6e mar-et return in t6e return model violates
t6e assumption underpinning t6is t6eor0. .6e mar-et return !dividend# would be e2pected to move in a similar
direction as return on capital. In real cases t6ese deviations occur) especiall0 w6en firms decide to retain more
profit in order to underta-e ot6er profitable investment proJects in t6e near future) in w6ic6 cases t6e0 negotiate
wit6 s6are6olders to pa0 small fraction of dividend for t6e period. /not6er possibilit0 for t6e inverse relations6ip
between t6e return on capital and t6e mar-et return also e2ist w6en capital owners bear part of t6e corporate ta2
burden for instance in t6e case of t6is stud0.
.6e corporate ta2 variable 6owever does ma-e sense) it follows t6e e2pected direction. .6e average coefficient
for corporate ta2 in t6e capital model is negativel0 !-:2%$.>(# related to returns and statisticall0 significant at 1
percent confidence level. .6e interpretation for t6e negative relations6ip means t6at an increase in ta2es would
result in a decrease in returns of capital owners. Notwit6standing t6e result above it does not provide ade?uate
evidence t6at capital owners bear t6e entire ta2 burden. Dr=0=ania- and Ausgrave !1>:*# conducted a similar
stud0@ t6e coefficient for t6e ta2 variable was positivel0 related to returns. .6e0 concluded t6at t6ere was more
t6an 1E s6ift of t6e ta2 bac-wards to labour or to consumers t6roug6 6ig6er prices. .6is conclusion invariabl0
points out to imperfect competition) because t6eories under competitive mar-ets predict t6at ta2es on corporate
rents cannot be s6ifted at all. Similarl0 3ilma !1>>$# conducted a similar stud0 and concluded in line wit6
Dr=0=ania- and Ausgrave. Since t6e inception of Dr=0=iania- and Ausgrave wor- man0 researc6ers 6ave
critici=ed t6eir findings. .6e average coefficient for t6e une2pected earning !9E# is %.1% but t6is is statisticall0
insignificant wit6in t6e 1 to 1 percent confidence level. .6e positive relations6ip between t6e earnings and
return on capital ma-es economic sense because returns on capital would increase proportionall0 to an increase
in earnings.
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.6e consumer model as indicated in table 2 above resulted in a coefficient for ./M in t6e e2pected direction
!.*%2# but it does not fall wit6in t6e accepted 1 to 1 percent levels of significance. .6e positive average
coefficient for ./M in t6e 8onsumer model provides evidence !t6oug6 wea-# t6at increases or decreases in ta2
rates are related to similar increases or decreases in gross profit percentages. .6e positive relations6ip is
evidence t6at some s6ifting in t6e corporate ta2 is ta-ing place and is reflected in t6e prices t6at consumers pa0
for suc6 products. .6e evidence indicates t6at about *%.2E of t6e ta2 is s6ifted to consumers. .6oug6 t6e
magnitude of s6ifting is small) firms can onl0 survive from t6e s6ifting w6en demand for t6eir products is -nown
to be inelastic and in t6e absence of perfect competition. 9nli-e earlier researc6 done b0 5ravelle !1>$>#) w6ere
6e assumed t6at corporate and non corporate firms produce similar products) t6e case of 56ana is different
because of differentiated products in bot6 mar-ets. 8"9) capacit0 utili=ation w6ic6 is a pro20 for economic
pressure) s6ows up as positive !.7%# and is significant at 1 percent confidence level. .6e evidence t6at return
on corporate capital increases as t6e corporate ta2 rate increases implies t6at profit margins will increase wit6 t6e
associated ta2 rate and 6ence t6is will command growt6 in productivit0. /n increase in productivit0 will go wit6
a corresponding increase in capacit0 in order to meet t6e rising demand in productivit0. 8"I) consumer price
inde2 is positivel0 related to gross price t6e dependent variable is significant at % percent significant level. .6e
positive relations6ip implies t6at as prices increase proportionatel0 wit6 corporate income ta2 in t6e consumer
model) t6e cost of living measured as t6e price indices will increase accordingl0.
.6e coefficient of t6e corporate income ta2 in t6e Kabour model indicates t6e rig6t direction !-1(.>*%# t6us !N
1
Q
# in t6e average regression and statisticall0 insignificant at t6e 1 percent confidence level. / negative
coefficient 6ere suggests t6at an increase in t6e corporate ta2 rate would result in a decrease in t6e proportionate
cost of labour. .6is would be t6e e2pected result for t6is model if t6e corporate ta2 is s6ifted to labour
!bac-wards s6ifting#. .6e evidence provided in t6e labour model indicates t6at an increase in corporate income
ta2 b0 1 percent would result in 1(.> percent reduction in t6e cost of labour. Bassett and Aat6ur !2:#
estimated t6e elasticities of wages and found out t6at t6e wage coefficient dropped indicating t6at capital owners
s6ift a proportion of t6e corporate ta2 bac-wards to labour. /s emp6asi=ed earlier on in t6is stud0) most
manufacturing firms are labour intensive due to t6e abundant suppl0 of labour in 56ana) t6is enable firms to s6ift
t6e greater portion of t6e corporate income ta2 to labour in t6e form of lower wages. 8omparativel0) it can be
confirmed from bot6 t6e consumer and labour models t6at labour bears a greater proportion of t6e corporate
income ta2 t6an in t6e case of t6e consumer. .6is result is so because consumers can easil0 move from t6e
corporate sector to t6e non-corporate sector t6at is assuming t6at bot6 sectors produce similar goods !5ravelle
21# unli-e labour because of t6e limited nature of emplo0ment in 56ana.
.6e 8/" variable !pro20 for tec6nological advancement# is negative !-:(.1*:# and statisticall0 significant at %
percent confidence level. .6e negative coefficient 6ere indicates t6at an increase in tec6nolog0 would lead to a
decrease in t6e cost of labour t6at corporations e2pend. .6is ma-es sense in t6at new tec6nolog0 improves
efficienc0 and reduces waste t6ereb0 reducing t6e cost of doing business. .6e coefficient of t6e unemplo0ment
rate !94
t
# is positive !1.$:*# and significant at 1 percent. / positive coefficient 6ere implies t6at an increase in
unemplo0ment rate would lead to an increase in t6e cost of labour for corporations. .6is ma-es logical meaning
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in t6e sense t6at an increase in t6e cost of labour would compel emplo0ers to la0 off some labour. Bence an
increase in t6e cost of labour would lead a proportionate increase in unemplo0ment. .6e repercussion effect of
6ig6 rates of unemplo0ment would also ma-e emplo0ers more powerful and would enable t6em to s6ift more of
t6e corporate ta2 to labour.
/dJustment of t6e corporate ta2 variable b0 1 percent 6ad almost no muc6 effect on t6e results especiall0 t6e
capital return model@ t6is is because t6e signs !a priori# remain unc6anged. 4eferring to .able 2) t6e coefficient
of t6e corporate ta2 variable is slig6tl0 less negative !coefficient is -:1>1.$*%. w6ic6 is :(.1% less t6an w6en
using t6e actual ta2 rate# t6is implies wit6 a 1 percent increase in corporate ta2) capital owners were able to s6ift
appro2imatel0 :( percent of t6e ta2 burden to ot6er pla0ers. .6e AD. w6ic6 is t6e mar-et return remain
statisticall0 unc6anged. .6e 9E) representing earnings 6ad its coefficient dropped from %.1% to %.1( due to t6e
marginal increase in t6e corporate ta2. .6is implies as corporations continue to bear part of t6e ta2 burden) t6eir
earnings will continue to drop@ t6e0 do not 6ave t6e abilit0 to s6ift t6e proportion of t6e ta2 increment to ot6er
pla0ers.
,rom t6e adJusted consumer model reported in table 2) t6ere is no evidence of upward adJustment in consumer
prices. .6e 1 percent increase in t6e corporate ta2 saw no c6ange in t6e coefficient of t6e ta2 variable. .6e
coefficient in bot6 t6e actual model and t6e adJusted model remain at .*%2. /ll t6e ot6er determining variables
included in t6e model did not also c6ange significantl0. .6e ./M variable in t6e labour model continues to s6ow
t6e e2pected directional relations6ip t6us !N
1
Q #. .6e negative relations6ip between t6e corporate ta2 rate and
labour 6as decreased slig6tl0 from -1(.>*% to -1(.$2$ but still significant at 1 percent confidence level. .6ere is
a continuous evidence t6at corporations reduce t6e cost of labour vi-a-vi an increase in t6e corporate ta2 rate. ,or
instance /lison !2># found out in a stud0 t6at t6e corporate income ta2 is significantl0 and negativel0
correlated wit6 wages and concluded t6at a 1 percentage point increase in t6e corporate income ta2 rate would
decrease wages b0 between .1( and .*: percent. Bis results translated into a wage elasticit0 of -.>( to
-.2( and it implies t6at ?uite a large proportion of t6e ta2 burden is borne b0 labour. .6e result continues to
s6ow a positive relations6ip between t6e cost of labour !K/7# and t6e unemplo0ment rate !94# impl0ing t6at as
long as labour cost continues to increase in relation to t6e corporate ta2) unemplo0ment continue to increase
proportionatel0. .6e ot6er determining variables suc6 as 8/" and 8"9 did c6ange marginall0 in relation to t6e
slig6t 1 percent upwards adJustment in t6e corporate ta2 rate. .6e 8/" continues to be negativel0 correlated
wit6 t6e cost of labour. .6e coefficient increased from -:(.1*: to -:(.1(: appro2imatel0 .1 increase. .6e
increment in t6e tec6nolog0 variable indicates t6at corporations will continue to reduce t6e cost of labour furt6er
to its minimal wit6 a given level of tec6nolog0 at t6eir disposal.
;%' :indin)s
The Capital Return Model
.6e first model !model *.1#) determines t6e relations6ip between t6e corporate income ta2 and t6e returns on
capital owners investment. .6e iteration of t6e model t6at includes adJustment on t6e ta2 rate b0 1E confirms
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t6at corporations still 6ave t6e tendencies of s6ifting part of ta2 burden bac- to labour and forward to consumers
t6roug6 an increase prices. Bowever) t6e findings of t6is stud0 were contrar0 to t6at of Dr=0=ania-) Ausgrave
and Dusan-0Cs in t6e si2ties !1>:s#. Dr=0=ania- and AusgraveCs stud0 resulted in a positive coefficient for t6e
ta2 variable in t6e return model indicating t6at more t6an 1E of t6e corporate ta2 is eit6er s6ifted forward to
consumers or bac-wards to labour or bot6. 8ontrar0 to t6ese studies t6e ta2 coefficient in t6e return model was
negative indicating t6at capital owners bear part of t6e burden of t6e corporate income ta2. .6e average
coefficient of t6e corporate ta2 variable in bot6 t6e actual data and t6e adJusted data were -:2%$.>( and
-:1>1.$*% respectivel0. Statisticall0 t6e elasticities of t6e ta2 variable indicate t6at as t6e ta2 was increased b0
1E) corporations were able to s6ift over :7.11 or :711E of t6e ta2 burden to ot6er pla0ers. .6is results
t6erefore supports t6e null 60pot6esis !7
0
# t6at t6e coefficient of t6e corporate ta2 variable is statisticall0 less
t6an =ero !#@ t6us 7
0.
N
1
Q. .6e negative relations6ip between t6e returns on corporate capital and t6e average
effective ta2 rate indicates t6at an increase in t6e corporate income ta2 rates would result in a decrease in
s6are6olders returns on t6eir investments. .6is anal0sis conforms to t6e underling t6eor0 in corporate ta2
incidence.
The Consu!er Model
.6e results of t6e consumer model in bot6 t6e actual and adJusted data concludes wit6 evidence t6oug6 wea-
t6at some of t6e burden of t6e corporate income ta2 is s6ifted forward to consumers t6roug6 6ig6er prices. .6e
average coefficient of t6e actual corporate ta2 variable in t6e consumer model is .*%2 and remained unc6anged
even w6en t6e adJustment was made on t6e corporate ta2. .6is coefficient was statisticall0 insignificant wit6in
t6e 1 to1 percent levels of significance and 6ence conforms to t6e alternative 60pot6esis w6ic6 states t6at t6e
coefficient of t6e corporate ta2 variable in t6e consumer model is greater t6an =ero N
1
P. .6e positive
relations6ip between t6e average ta2 rate and t6e gross profit percentage provides evidence t6at prices increase
relative to increases in t6e corporate ta2 rate.

La#our Model
.6e results of t6e labour model provide evidence t6at part of t6e ta2 burden is s6ifted bac-wards to labour. 7ot6
t6e actual and adJusted data used in t6e labour model confirmed t6e alternative 60pot6esis) t6us t6e 60pot6esis
t6at Ut6e coefficient of t6e ta2 variable is less t6an =eroC. .6e actual or raw ta2 s6owed a coefficient of -1(.>*%
w6ile t6e adJusted model s6owed a ta2 coefficient of -1(.$2$ all attesting to t6e degree of s6ifting. 7ot6 tests
indicate t6at t6e coefficients were significant at 1 percent. .6e results also demonstrated t6at a 1 percent
increment in t6e corporate ta2 would result in 11 percent fall in t6e burden of t6e ta2 on labour. ,rom t6e
regression anal0sis t6e following observations were made) unli-e t6e results obtained b0 5ravelle et al., !1>>*#)
t6e results in t6is stud0 indicates wit6 strong evidence t6at labour bears part of t6e burden of corporate income
ta2. .6is is observed from t6e negative relations6ip between t6e ta2 variable and t6e labour variable. .6e
adJustment in t6e corporate ta2 confirms t6at t6e degree of s6ifting continues even wit6 an increase in t6e ta2
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rate. Bowever t6e e2tent to w6ic6 capital owners can s6ift t6e ta2 to labour decreases relative t6e ta2 increment
as demonstrated in t6e adJusted model of labour. 8ontrar0 to t6e impact of t6e ta2 increment on labour) t6e
coefficient of t6e ta2 variable remained unc6anged in t6e consumer model even after t6e ta2 6as been increased
b0 1 percent. .6is implies t6at an increase in t6e corporate ta2 6as minimal or no impact on t6e prices t6at
consumers pa0 for corporate goods. .6ere was an indication of a s6ift in t6e corporate ta2 b0 corporations to
ot6er sta-e6olders li-e labour and consumers but contrar0 to t6e findings of Dr0=ania- and Ausgrave in 1>:*)
t6ere was a less t6an 1E s6ift in t6e ta2) impl0ing t6at capital owners bear part of t6e ta2 burden. .6ere is
evidence t6at an increase in corporate ta2 reduces t6e degree of t6e burden on capital owners. ,or instance w6en
t6e ta2 was increased b0 1 percent t6e coefficient of t6e ta2 dropped from -:2%$.>( to -:1>1.$*%) indicating
more t6an :7E reduction in t6e burden on owners.
?% Concl&sion
8orporate income ta2 is levied on corporate earnings. "olitical and economic debates fre?uentl0 arise over t6e
fairness and t6e effect of t6e corporate income ta2. Even t6oug6 t6e ta2 is levied on corporations but we must not
lose sig6t of t6e fact t6at corporations are not people. .6erefore individuals must ultimatel0 bear t6e burden of
t6e corporate ta2 eit6er directl0 or indirectl0. .6e distributional e?uit0 and effect of t6e corporate ta2 depend on
w6ic6 individuals ultimatel0 bear t6e burden of t6e ta2. If t6e incidence of t6e ta2 falls on s6are6olders) t6e ta2
will be more progressive because t6ese owners tend to be wealt6ier. / progressive ta2 is usuall0 considered
more e?uitable t6an a regressive ta2. If t6e s6are6olders bear t6e ta2 burden) t6en t6e ta2 could be considered as
a ta2 on capital and as suc6 ma0 discourage investment. Bowever) if t6e burden of t6e ta2 falls on consumers or
labour) t6e corporate income ta2 ma0 6ave a regressive effect. It is t6erefore important for polic0 ma-ers and
researc6ers to be able to -now w6ic6 pla0ers of t6e econom0 bear t6e actual incidence of t6e corporate income
ta2. .6e intention of t6is wor- is to provide empirical evidence on t6e incidence of corporate income ta2 in t6e
manufacturing sector of 56ana. .6e results demonstrated some degree of s6ifting in t6e ta2 burden but t6e
magnitude of t6e s6ift still leaves t6e ?uestion of w6o reall0 bears t6e ta2 incidence unabated and at suc6 more
wor-s must be done to answer t6is ?uestion. .6is stud0 provides a step towards answering t6e ?uestion of w6o
bears t6e burden of corporate income ta2.
% /ecommendations
/s stated earlier on at t6e introductor0 part of t6is paper) t6ere are controversies as to w6o reall0 bears t6e
incidence of t6e corporate income ta2. .6is paper intended to reveal t6e actual incidence of t6is ta2 but as it
stands) it leaves t6is ?uestion unabated@ t6erefore we ma-e t6e following recommendations.
1..6e result of t6is paper indicate evidences of s6ifting in t6e corporate ta2 but t6ese evidences are wea- to
predict t6e actual incidence) we t6erefore entreat future researc6ers to e2pand t6is -nowledge base to encompass
ot6er sectors of t6e econom0 in order to determine t6e actual incidence of t6is ta2.
2. "olic0 ma-ers oug6t to be informed b0 t6is paper t6at corporations are not people and t6erefore t6e incidence
of t6e corporate ta2 fall ultimatel0 on individuals. If it is t6e intention of polic0 ma-ers to t6in- t6at corporations
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bear t6e ta2 burden t6en it is a fallac0) 6ence t6e0 must put mec6anisms suc6 as auditors to ensure t6at t6ese
ta2es are not s6ifted to ot6ers in order to avoid t6e problem of double ta2ation.
*. "olic0 ma-ers must be aware t6at t6e ta2 influences inversel0 on t6e incentive to invest in a particular
portfolio. Bence t6e0 must ensure t6at t6ese ta2es are convenient) fair and certain and finall0 e26ibits t6e benefit
principle to t6e ta2 pa0er.
/E:E/E@CE9
/lison) ,. 4.) V Bines) J. 4. !2>#. 8orporate .a2es and 9nion 3ages in t6e 9nited States) 3or-ing "aper No.
1%2:* !8ambridge) Aass; National 7ureau of Economic 4esearc6.
/lison) 4. ,. !2>#. FDo State 8orporate Income .a2es 4educe 3ages)G Economic Review) ,ederal 4eserve
7an- of Dansas 8it0) 'ol. >(.
/rulampalam) 3.) Devereu2) ". A.) V 5iorgia) A. !211#. .6e Direct Incidence of 8orporate Income .a2 on
3ages) 3or-ing "aper 3">S17 !&2ford) 9.D.; &2ford 9niversit0 8entre for 7usiness .a2ation) Aarc6 211#.
7allentine) 5. J. !1>$#. E?uit0) Efficienc0 and t6e 9.S. 8orporate Income .a2. 3as6ington) D.8.; American
Enterprise Institute for Public Policy Research.
8ragg) J. 5.) Barberger) /. 8.) V Aies=-ows-i) ". !1>:7#. ''Empirical Evidence on t6e Incidence of t6e
8orporate Income .a2.H Journal of Political Economy) 'ol. 7% !December#) $11- 21.
Dusans-0) 4. !1>72#. H.6e S6ort-4un S6ifting of t6e 8orporate Income .a2 in t6e 9nited States.H Oxfor
Economic Papers. 'ol. 2( !November#) pp. *%7-71.
5oode) 4. !1>::#. !Rates of Return, Income "hares, an #orporate $ax Incience.H Effects of 8orporation
Income .a2) edited b0 Aarian Dr=0=ania-. Detroit; 3a0ne State 9niversit0 "ress.
Ball) 8. Jr. !1>:(#. HDirect S6ifting of t6e 8orporation Income .a2 in Aanufacturing.HAmerican Economic
Review. %ol. &') 2%$-71.
Barberger /. 8. !1>:2#. .6e Incidence of t6e 8orporation Income .a2. Journal of Political Economy 7 !*#)
June) pp. 21%-2(.
5ravelle) J. 5.) V Dotli-off) K. J. !1>>(#. .6e Incidence and Efficienc0 8osts of 8orporate .a2ation 36en
8orporate and Noncorporate ,irms "roduce t6e Same 5ood. Journal of Political Economy >7 !(#) /ugust)
7(>-7$.
5ravelle) 8. J. !21#. 8orporate .a2 Incidence; / 4eview of 5eneral E?uilibrium Estimates and /nal0sis)
3or-ing "aper 21-* !8ongressional 7udget &ffice Aa0 21#.
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Bassett) D. /.) V /parna) A. !2:#. .a2es and 3ages) 3or-ing "aper 12$ !3as6ington) D.8.; /merican
Enterprise Institute#.
Dr=0=ania-) A.) V Ausgrave) /. 4. !1>:*#. $he "hiftin( of the #orporation Income $ax !7altimore; Jo6n
Bop-ins "ress#.
&a-land) B. 3. !1>72#. H8orporate Earnings and .a2 S6ifting in 9.S. Aanufacturing) )*+, )*-..H Review of
Economics an "tatistics. 'ol. %( !/ugust#) 2*%-((.
4ogers) D. !1>>:# 8ongressional 7udget "aper F.6e Incidence of t6e 8orporate Income .a2G
Slitor) E. 4. !1>::#. H8orporate .a2 Incidence; Economic /dJustments to Differentials under a .wo-.ier
.a2 Structure.H In Effects of 8orporation Income .a2) edited b0 Aarian Dr=0=ania-. Detroit; 3a0ne State
9niversit0.
.ure-) J. !1>7#. HS6ort-4un S6ifting of a 8orporation Income .a2 in Aanufacturing) 1>*% 1>:%.H /ale
Economic Essays. %ol. ), !Spring#) 127-($.
+ounger) D. S. !1>>*#. / Stud0 on 8orporate Income .a2 FIncience of $axationG

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A,,E@<I5.
Data
Items
1997

199A 1999 2000 2001 2002 200' 200; 200? 200
No. of
S6ares
1>.(2
%
1>.(2
%
21.(1
(
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