“Corporations are People” But Which People?

By :: August 12th, 2011

In a shouting match with a demonstrator at the Iowa State Fair yesterday, GOP presidential hopeful Mitt Romney argued against raising corporate taxes, asserting that “Corporations are people.”

He’s right, of course, in both the legal sense—the law treats corporations as if they are people—and in the economic sense—what happens to corporations affects people. Corporations are merely a legal convenience that people use to organize their businesses. That specifically applies to the taxes corporations pay: The corporation is the conduit but the burden of the tax falls on individuals. The question is “On whom?”

There are four main possibilities: the owners of the corporation, owners of capital in general, workers, and consumers. A) The corporation’s owners could get a smaller return on their investment if the tax reduces profits. B) All owners of capital could suffer if the tax induces a reallocation of investment toward less profitable but untaxed endeavors, thus reducing the after-tax return to all affected capital. C) Workers could receive less pay if the tax causes investment to move away from the firms that employ them, leaving them less productive than they would otherwise be. D) Consumers could pay more for the firm’s products if reduced output pushes prices up. Most likely the answer is E) All of the above.

So which group actually pays how much of the tax?

Economic analyses reach different conclusions, largely depending on what they assume about how readily capital and workers can move among industries and across borders. Some of the tax almost certainly falls on investors, since they can push the tax onto others only by moving to less profitable but untaxed activities (which pay more net of taxes) or raising prices and selling less. The question is how much and how quickly factors adjust to the tax.

If capital can shift readily from taxed to untaxed businesses—but workers can’t—much of the tax would likely fall on those workers. That’s more likely when capital moves across national borders, making it harder for workers to follow. In a 2006 Congressional Budget Office analysis, Bill Randolph found that international capital mobility could result in American workers bearing 70 percent of U.S. corporate taxes. Other studies have found even higher shares falling on workers. Kevin Hassett and Aparna Mathur, for example, showed that wages could actually fall by more than the amount of the tax increase, suggesting that workers bear more than 100 percent of the burden.

By contrast, a more recent CBO study by Jennifer Gravelle reviewed four papers looking at corporate tax incidence. Applying reasonable estimates of how economic activity changes in response to market changes (what economists refer to as “elasticities”), Gravelle found that the owners of capital likely bear well over half of the corporate tax, particularly in the short run when capital cannot move much. And she argues that the long run—when mobility is greatest—could be very long.

The Tax Policy Center’s model assigns the full cost of the corporate tax to owners of capital, but that assumption is far from settled. Future work may lead to different conclusions.

Regardless of what economists conclude about the burden of the corporate tax, however, Romney was right in his unspoken assertion: Corporations may write the check, but it’s people who ultimately pay corporate taxes.