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.