Thursday, August 04, 2011

The Truth About Who Pays Corporate Taxes

Are you as sick as I am of hearing, courtesy of the recent federal debt limit debates, that 'big/rich corporations should pay more/higher taxes?'

I don't think I could watch CNBC or Bloomberg for the past month without hearing some Democratic Congress member, the president, or a liberal pundit repeat some variant of that old saw.

Trouble is, it demonstrates complete economic illiteracy by those who mouth those sentiments.

Harvard economics professor Greg Mankiw wrote in his blog, borrowing from his textbook,

"But before deciding that the corporate income tax is a good way for the government to raise revenue, we should consider who bears the burden of the corporate tax. This is a difficult question on which economists disagree, but one thing is certain: People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation.

Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why, consider an example. Suppose that the U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways—for example, by buying larger houses or by building factories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall.

The corporate income tax shows how dangerous the flypaper theory of tax incidence can be. The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters."
While I have grown weary of federal elected officials of both parties displaying their economic ignorance, even as they dangerously legislate tax policy, I fault even more the business network pundits who continue to spout this nonsense without correcting the fallacy that corporations really pay any tax at all.
Ultimately, as Mankiw explained, it's taxpayers, either as company owners, consumers, or employees.

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