Who Bears the Burden
of the Corporate Income Tax?
No other question in the arena of public finance is as
controversial as “who bears the burden of the corporate income tax. Economists who specialize in public finance
simply don’t know. So, if you encounter
an economist who says he does know, you will know you have found an economist
who says more than he knows!
The first fact to get on the table right at the beginning is that only people pay taxes. Corporations remit taxes, of course, based on income that they earn (a.k.a., net income or profits), but that does not mean that corporations (which are not persons) bear the burden of taxation of corporate income. By now in this course, we are familiar with the difference between tax incidence and tax liability.
Whoever it is that bears the burden of taxation of corporate
income, those persons will get to spend (or save) less each year than they
otherwise would, if the United States did not tax income earned (a.k.a.,
earnings or profits) by businesses registered with the IRS as C corps. Only persons
from three broad categories could possibly bear the burden. They are (1) shareholders of a corporation
(owners of the corporation), (2) owners of the factors of production (land,
labor, and capital), which the corporation pays to use, (3) persons who buy
goods or services from the corporation (consumers). Consequently, I am absolutely certain that I
do not bear any burden of the income tax paid by GM, since I am not a
shareholder, I do not sell GM factor services that I own, and I do not buy GM
products.
Students of public finance will recall that people who have few options to
avoid a taxed activity (such as earning income or buying cigarettes or buying insulin) will end
up bearing all or part of the burden of any tax, regardless of who actually has legal
liability to collect and remit the tax.
Economists say that such persons have “inelastic” demand (or supply)
curves for the activity. Perfectly
inelastic demand or supply curves result in complete bearing of the burden of a
taxed activity in which one engages.
So,
if I must work to live, and if the politicians tax wage income, then I will
bear nearly all the burden of a tax on my wages. On the other hand, if I am independently wealthy,
and the politicians tax wage income, I can avoid bearing part of the burden of
a tax on wage income by reducing the hours I work for pay, up to and including
not working for wages at all!
I am really confident that shareholders bear the immediate
burden of a new or a raised tax on corporate income in the economic short
run. They do so because the corporation
will remit money to the government that would otherwise have gone directly to
shareholders equity (retained earnings) or would otherwise have been paid
directly to the shareholders as dividends.
Following the imposition of a new or a raised tax, corporations will not
have time to raise the price of their products to shift the tax forward to
consumers, nor will they be able to shift the tax backward to employees by
reducing their wages and salaries, nor will they be able to shift the tax
backward to owners of land they are renting by negotiating a lower rent, nor
will they be able to reduce what they are paying for any other factor of
production.
But in the economic
long run (after people make all the adjustments to a new tax they care to
make), I think that consumers of goods and services sold by corporations bear
most of the burden of taxation of corporate earnings. I cannot be sure, though, because the lived
world does not allow economic researchers to conduct an experiment that can
appropriately hold everything else constant while we impose a new tax and
measure everyone’s income before and after the new tax, after an appropriate
amount of time has passed to allow everyone to make all the adjustments they
care to make.
But we can be sure
that given enough time, shareholders (who are supplying capital to finance
activities of corporations) will reduce the quantity of money (capital) they
supply, if the rate of return to holding shares of corporations is lower than
the rate of return such savers (a.k.a., investors) can earn through some other
activity. Alternatives to holding shares
of stock in a corporation abound. One
can buy gold, paintings by Monet, farm land in the Midwest, corporate bonds,
silent partnerships in non-corporate forms of business, etc. Investors (a.k.a., savers) do not have to buy
shares of stock in C corporations in the
United States. Capital always flows to
the highest bidder (of equal risk), given enough time, just like water seeks
the lowest level. So, owners of capital
have options for avoiding the corporate income tax. It’s hard to imagine how shareholders will
end up bearing the burden in the economic long run.
What about employees of corporations? Can owners of a corporation (shareholders)
push the burden of the corporate income tax backward to its employees, by
reducing their pay (or by withholding future raises as inflation occurs)? Or, can employees just work somewhere else,
should owners of the corporation try to shift the tax? Do employees have options to avoid the
backward pushing?
At this point, I want to point something out. Shareholders do not meet somewhere and vote
whether or not to try to shift the income tax levied against their
corporation. Moreover, employees have no
way of knowing whether their wages and salaries are not rising fast enough to
avoid getting some of the burden pushed back to them. The very language that economists use to talk
about shifting tax incidence is actually a little silly, since any tax shifting
that occurs is completely hidden from view and takes an unknown amount of time
to occur, if it does occur.
What about consumers who purchase the products of
corporations? In the economic long run,
can corporations simply raise their prices to shift the burden of their income
tax forward to consumers? I think that
corporations can and do just that. After
all, businesses must be able to recover all the costs of production, plus a
competitive profit to compensate owners of the business, in the economic long
run. Businesses that cannot cover all
the costs of production will quit producing, in the economic long run.
From the point of view of a business owner, paying taxes is just
like paying the electric bill. Taxes can
be thought of as a slip of paper that says “you paid your taxes,” which slip of
paper is required to produce and sell, and which is just another cost of doing business.
Consequently, I think that in the economic long run, prices of goods and
services produced by corporations adjust upward to include the complete burden
of the corporate income tax, thereby shifting the burden of the tax to people
who buy those products.
But, I will conclude by repeating that I cannot know
for sure, nor can any other economist.
