Who Really Pays the Corporate Income Tax?
After the Government Accountability Office reported last month that two-thirds of corporations in the
Eric Toder countered on TaxVox that it was all much ado about nothing (or not much). But there is a real question there: “Who pays (or doesn’t pay) corporate income taxes?”
The answer is less obvious than it might seem. Sure, companies write the checks, but the money eventually comes out of people’s pocketbooks. Whose?
Individuals bear the burden of corporate taxes in one of three ways: as owners of capital who get a lower return on their investment, as workers who receive lower wages, or as consumers who pay higher prices.
Economist Arnold Harberger showed more than 40 years ago that in a hypothetical world with impermeable borders, no trade, and a fixed stock of capital, capital owners bear the full tax, whether they are part of the corporate sector or not. Capital moves from the taxed corporate sector to the untaxed non-corporate sector until the after-tax return to additional investment in either sector is the same. Less capital in the corporate sector raises the return to the remaining capital while more capital on the non-corporate side lowers returns to investment in that part of the economy. All owners of capital bear the cost of the tax in terms of lower net returns.
Open up the economy so that capital can move among countries—but labor cannot—and the picture changes. Capital again moves until returns are equal everywhere, leaving less capital at home. With less capital to work with, domestic workers become less productive and their wages fall. Meanwhile, workers in other countries benefit from having more capital and their wages rise. In such a situation, as CBO economist Bill Randolph has shown, domestic workers might bear 70 percent of the corporate tax through lower wages, foreign workers can gain an equivalent amount through higher pay, and capital owners worldwide share the full burden of the tax in lower returns. What actually happens depends on how readily capital can move, how easily capital can be substituted in different uses, how willing consumers are to substitute domestic and foreign goods, and a host of other factors.
Figuring out just who pays the corporate tax is very complicated and contentious (just try reading this review of the economic literature) and economists have yet to reach consensus. Different models and different assumptions about substitutability of capital, labor, and goods lead to different conclusions. A 2006 analysis concludes that, primarily because domestic and foreign goods are imperfect substitutes, much of the burden of the tax falls on capital. In line with that conclusion, the Congressional Budget Office and TPC allocate all corporate tax to capital in their distributional analyses.
Thanks for sharing a great article on income tax return.
That was mind boggling. Now I don't know which one is the lesser evil: The companies not paying the tax or paying them and cutting the employees' salaries. Guess it's the former.
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The link “this review” concludes much differently than the “A 2006 review”. Perhaps the Office of Tax Analysis review is more up to speed with reality than the Congressional Budget Office and TPC. Don't “try to read it”. Read it.
The former includes this in its conclusion: “A common assumption, based on theoretical models of tax incidence, is that capital bears the burden of the corporate income tax. Recent empirical work using cross-country data on corporate taxes and wages suggests reconsidering this assumption; labor may actually bear a substantial burden from the corporate income tax.”
By reading the entire document, it seems that the three studies have concluded that labor bears a substantial burden, if not a greater burden than capital.
It seems that the latter link’s judgment is based primarily on outdated information on the global economy. The world is moving at an incredible pace, and the findings of the former link seem to be much more up to speed with reality.
Being an International student dealing with these ideas and economic shifts on a daily basis, my conclusion is that the Congressional Budget Office and TPC need to hurry up and get on the ball. Sitting on old conclusions based on the past arrangement of the non-global economy, simply because data is not accurate enough on the new state of the global economy, isn’t going to solve a thing. No matter which conclusion you choose in the separate studies of the “this review” link, increasing corporate income taxes is leaning heavily on feeding of the laborer.
I can vouch for that just by travelling the globe, living on four continents, and seeing the evidence with my own eyes. Communications, technology, and the transfer of capital are moving at an extraordinary pace compared to the past. Attempting to implement higher corporate income taxes is only going to backfire on us.
Read the entire report, then inject communications and technology (the main culprits of the global economy), and voi-la; American labor = in serious trouble if we increase corporate income taxes. Less emphasis is place on rising prices, but I do not think that is true. If the dollar returns to a downtrend, inflation will increase.
Some of the arguments attempt to balance things out; however, the general trend is the effect on the American worker who is geographically locked in, coupled with my belief that there will be a greater outflow of skilled labor.
Increasing corporate income taxes is only going to make the average American and our nation totally uncompetitive in the global market, increase government, increase spending, and ultimately fail at getting its hands on everything it wants.
Americans really need to stop thinking America is this contained country with impenetrable borders, and start thinking about the rest of the world, how it's coming for us.
The burden on capital, as stated in the 1st link I mentioned, fits more into a “closed borders” type country/economy, and it totally makes sense.
“A 2006 analysis concludes that, primarily because domestic and foreign goods are imperfect substitutes, much of the burden of the tax falls on capital.”
Sticking to this line of logic, perfect substitutes would cause much of the tax burden to fall on workers and consumers … oil, has perfect foreign substitutes, alas, a corporate tax increase on oil companies would mostly hurt consumers and workers.