Who Pays the Corporate Income Tax?

By :: September 13th, 2012

Who pays the corporate income tax?  It is one of the most vexing questions tax experts face. Now, to keep pace with the latest research, the Tax Policy Center has revised its methodology for figuring where this tax falls. The bottom line: For the first time, TPC assumes that workers bear some of the corporate tax burden.

In newly-published assumptions, TPC figures 20 percent of the corporate income tax is borne by labor and 80 percent by capital. TPC further refines the capital share by dividing it into two chunks.  Twenty percent of the levy is reflected in normal returns (essentially, equal to the return from low-risk bonds) and 60 percent in any additional returns received by shareholders.

The revision, similar to adjustments made recently by the Treasury Department and the Congressional Budget Office, will be important as TPC analyzes tax reform plans that reduce corporate rates.

That’s because, until now, TPC assumed investors ultimately paid the entire corporate tax in the form of lower returns to capital. Now, TPC concludes that labor also pays through lower wages. As a result, workers, as well as shareholders and other owners of capital, would benefit from any cut in the corporate tax. Similarly, both would take a hit if corporate taxes are hiked.

These new assumptions revise the way TPC distributes corporate income tax changes to individuals. In effect, low- and moderate-income taxpayers (who make most of their money from wages) will benefit a bit more from cuts in the corporate tax. Under TPC’s old method, almost all of the benefit of those tax cuts went to high-income households (who make much of their money from investments).  However, even with the changes, high-income households still get the lion’s share of the benefit.

The revisions don’t make much difference when TPC looks at how tax changes affect various income groups--largely because corporate income taxes account for only about 10 percent of federal revenue.

Look at what happens in 2015 under current law (that is, assuming all the Bush-era tax cuts and the Alternative Minimum Tax patch expire). Under the old methodology, households in the middle 20 percent of the income distribution would pay a total effective tax rate of 18.2 percent, while they’d pay 18.6 percent under the new one. The top 1 percent would pay a 39.5 percent rate under the old model, but only 38.9 percent under the new one.

To understand the change, think about the nature of corporate income taxes. Sure, a corporate CFO writes a check to the IRS, but ultimately her firm is nothing more than a legal convenience—a mechanism for a group of people to join together to form a business. People, not a stack of incorporation papers, ultimately pay taxes.

The idea that the corporate income tax is borne by capital alone was based on a paper written a half-century ago by the influential economist Arnold Harberger. But Harberger was looking at a closed economy where capital did not flow freely around the world as it does today. Now, investors can move their money overseas when tax rates on U.S. corporate investment rise. That means workers in the U.S. have less capital to work with, which makes them less productive, and leads to lower wages.  Because it is not so easy for workers to move, they end up paying some of those corporate taxes in the form of reduced compensation.

If you are interested in the details, my colleague Jim Nunns laid it all out in a technical, but very readable, paper.

These revisions to TPC’s analysis are the most important change in a bigger package of technical adjustments to its tax model.  TPC makes those revisions each year to reflect updated tax data and the latest economic forecasts. But it was time to rethink the corporate tax issue as well. While this surely won’t be the last word on the subject, it better reflects the current thinking on a very thorny question.


  1. Who Pays the Corporate Income Tax? « Donald Marron  ::  3:15 pm on September 13th, 2012:

    […] For another overview, see this TaxVox post by Howard Gleckman. Share this:TwitterFacebookLinkedInEmailDiggRedditStumbleUponPrintLike […]

  2. Michael Bindner  ::  4:05 pm on September 13th, 2012:

    Adds some light to the term “Corporations are people, my friend.” The way to make this question irrelevant in to enact a Value Added Tax or a VAT-like Net Business Receipts Tax, with a surtax on only the richest households (joint filers at $150,000 under current income levels or $100,000 after most payroll and income taxes are replaced by consumption taxes).

    It was good to make the change, because it recognizes the existence of oligopsonistic pricing (and monopsonistic competition) in labor markets. That is – with few buyers or buyers who can tailor the job sufficiently that they can pick and chose among workers rather than having to hire the first available worker. Whether the 20% number accurately reflects the degree to which capitalists profit off of labor or not is certainly an apt subject for future research – and some industries are worse than others – especially in absence of a more effective minimum wage and more effective training and welfare programs so that low wage workers have decent alternatives.

  3. Ralph H  ::  6:17 pm on September 13th, 2012:

    I would venture to say 20% is low in today’s global economy. We see the effects in the mass layoffs and plant closings in Mid America. While low offshore wages can be combatted with more automation, most multinationals do not want to bring dollars back because they will be taxed. Until we change policy expect loss of more jobs, particularly unionized factories. The losers are our workers. capital can easily be invested overseas but our people need jobs.

  4. A. Caruso  ::  10:38 pm on September 13th, 2012:

    For some free tax and investment advice from a CPA and Registered Investment Advisor vist http://www.carusoandcompany.com during business hours and click the chat button on the bottom.

  5. Tax Roundup, 9/14/2012: Jenkens partner pleads guilty ahead of re-trial. « Roth & Company, P.C  ::  9:06 am on September 14th, 2012:

    […] Gleckman,  Who Pays the Corporate Income Tax? (TaxVox).  Mr. Gleckman is with the Tax Policy Center, an influential center-left think tank.  […]

  6. Ray  ::  6:52 pm on September 14th, 2012:

    The only person who could possibly pay corporate income tax is the consumer. Corporations have only one end source of money, the person who buys their product.

  7. Kevin P  ::  11:50 am on September 16th, 2012:

    This is a key topic to understand the fallacy of the Obama promotion of the Buffett rule. Buffett owns roughly 25 – 30% of Berkshire-Hathaway. Thus, in very real terms, his total tax rate is ~ 44%, or 15% dividend and 30% corporate (B-H corporate rate is a little less than 35%, typically). In other words, dividend taxes are a double tax. For example, a cut (or increase) in the corporate tax rate would go immediately into (out-of) his pocketbook.
    Now, interesting question – why wouldn’t Buffett simply pay himself a huge salary, which is only taxed once – and is deductible before the corporate tax (above the line), thereby reducing is total tax from 44% to 35% roughly speaking?
    Answer – section 162(m) of the 1993 IRS tax code limits the salary deduction over $1 million for top executives. In other words, Buffett’s tax would be 70% if he took his income purely in salary!
    The bottom line, discussing low tax rates for the rich as 15% are a falsehood because much of their lower rate is actually much higher when considering the double taxation implications of the corporate tax. In fact, the Tax Policy Center’s own tax tables show these corporate tax liabilities in the aggregate as a component of the Total Tax. They also need to be part of the discussion in order to have an honest debate about Buffett and other exception cases.

  8. carl  ::  4:38 pm on September 17th, 2012:

    Your right in how your thinking about it. But that is over simplified.

    A corp can Layoff people to increase their bottom line, Better align their prices with demand. Move labor to cheaper countries. Look for corp Tax loopholes. Cut pay. Sell more shares of their company. Money from lawsuits on bogus patents.

    I could probably go list about 50 other places money can come from. And I will clarify, I mean a company starts a quarter with X dollars, and ends it with X + $1Billion Dollars. That extra money isn’t always from increased sales, or revenue.

    Perfect example is the solar power industry. Fact is, Most american companies chose the wrong tech to invest in (The chose to invest in beta, instead of VHS). And, instead of risking losing all their busniess… Our good ol POTUS, has Massive tarrifs setup on all Solar panels brought in from overseas. Excluding the exceptions, the tarrifs exceed 200%.

    Anyways, my point is.. Though your comment is correct, as ultimately someone is paying money somewhere, it is not complete

  9. carl  ::  4:46 pm on September 17th, 2012:


    We can entice businesses to be brought to American, without reducing our standards.

    We don’t need sweat shops to get people to setup shop here. We just need them to have a good reason:
    Stable government.
    Stable economy.
    Balanced budget.
    A somewhat predictable roadmap.
    Great infrastructure.
    A more efficent Patent and copyright office (read as: less frivilous IP lawsuits).

    I think that is a good start. A country with any combination of those things, would be a gold mine, and bring in a great deal of new businesses.

  10. John B.  ::  6:05 am on September 20th, 2012:

    This post is right in some terms but it fail to name the biggest fallacy of corporations, which is outsourcing and moving constantly money from one country to another. The tax income from corporations is not as high as it would be if there were more local or regional producers. I consider your post correct on the economical level, but I don´t think that we are confronting it right by lowering or raising taxes. It is more a legal problem – corporations should be obliged to pay taxes and not evade them by legal system. Consider the example of How credit unions escape new mortgage rules.

  11. Ralph H  ::  12:27 pm on September 21st, 2012:

    Historically Berkshire-Hathaway pays no dividend, which suits Warren very nicely. He owns multi-billions worth of stock, which means he can sell or borrow against it as needed. He also is relatively frugal so if he were to sell, say $2Mil worth of stock he would pay 15% or $300,000 tax —- a pretty small percentage. However his net worth can easily go up 10% or more in a year and he pays nothing on that! Contrast that to someone with only salary income who is trying to accumulate savings and you see the inequality problem.

    You are right that BH pays the roughly 35% on tax whether or not it goes out as dividend.

    Oh yes Br Buffett also gets to avoid tax on the stock he donates to the Gates foundation.

  12. Albert Ramis  ::  1:38 pm on January 11th, 2013:


  13. What if we taxed corporate revenue instead of profit? – Democrats, Republicans, Libertarians, Conservatives, Liberals, Third Parties, Left-Wing, Right-Wing, Congress, President – Page 2 – City-Data Forum  ::  4:26 pm on April 19th, 2013:

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