Ritchie puts us straight on the incidence of the corporate income tax

The tax debate has reached the level of farce if this is the benchmark Gauke wants to use. But it gets worse:

The second challenge we face is that people believe – or at least give the impression they do – that corporation tax is somehow a victimless tax, not paid by real people.

Of course, as with any tax, the incidence will ultimately fall on someone.

As far as corporation tax is concerned, the question is whether the burden falls on shareholders (largely in the form of pension funds) employees (through lower wages) or consumers (as a result of higher prices).

The consensus, among economists at least, is that it’s predominantly the employee who foots the bill.

This is based on the work of Professor Mike Devereux at the Oxford Centre for the Non-Taxation of Business. Mike is so neoliberal and so open minded he’s banned me from his Centre for a) questioning his assumptions and b) challenging his objectivity when doing so. But ministers still listen to him because it suits their purpose to do so.

Devereux’s work is, however, fatally flawed. What he has argued is that when corporate taxes increase then wages fall. There’s a problem with this though. First, corporate tax rates have fallen almost universally for the last twenty years so he had to work really hard to find his data. Second, he tested only one way even though the hypothesis would have been vastly easier to test the other way – did wages rise when corporate taxes fell? If they didn’t then clearly the relationship when corporate taxes rise is explained by other factors and the correlation he finds is just coincidence. Devereux must have known corporate tax decreases do not result in wage increases, but he chose to ignore the evidence running his tests in this direction could have given to ensure he could deliver the desired result of his work – that corporate taxes are, in accordance with his neoliberal mantra, and that of his funders (for the FTSE 1000 Group of Finance Directors do fund the Oxford centre) desired.

There are many other flaws in his work – but this is the fundamental one – and it reveals (in my opinion, but I know not his) clear political bias to the work which of course also appeals to David Gauke.

No, it isn\’t based on the work of Mike Deveraux.

Up to you whether you ascribe Richard\’s insistence here to malice or ignorance. Entirely your choice.

This is the absolutely standard economics of taxation. It is not a left point, a right point, a neoliberal, classical, Keynesian, New Keynesian, RBC, New Classical nor even a social democratic point.

It is simply an observation about the universe which we inhabit.

Mike Deveraux\’s contribution here has been to make an estimate of what the incidence is here in the UK. NOT, in the underlying theory, but to try and work through the numbers as to whether the workers carry 10%, 90%, more than 100%, of the economic burden of the corporation tax. His answer is arguable, depends upon some assumptions you may or may not be happy in accepting and is that the incidence is more than 100% on wages. That UK workers lose more in lower wages than the amount raised in corporation tax.

That companies do not pay tax we know. That the burden is carried by some combination of shareholders, workers and customers we similarly know absolutely. We even know, again as a matter of fact, not opinion, that the more open the economy and the smaller the economy with regard to the world economy, the more of that burden will be carried by the workers and the less of it by capital.

This is not negotiable and Richard is simply flat out wrong as he wriggles to try and deny it.

How much by whom is certainly still arguable: but not that companies do not pay tax and others do carry that burden

5 comments on “Ritchie puts us straight on the incidence of the corporate income tax

  1. So what he is saying is that because increased corporation taxes cause reductions in wages then tax decreases must cause rises in wages?

    And because the second case isn’t true, the first can’t be either.

    Am I right?

    Is this his logic?

  2. “That the burden is carried by some combination of shareholders, workers and customers we similarly know absolutely.”

    If you work in the private sector you are a worker and a customers and very likely a shareholder (at least through your pension), so you are going to bear the tax whatever the balnce between the three. If you work for the public sector, Corp tax does not affect you as a worker (paid out of taxes) or as pensioner (paid out of taxes). So, what Corp tax most certainly does is to penalise those who work in the private sector s against those who don’t. It is indefensible.

  3. Ignoring the right and wrongs of the arguments, this is the bit that is so outrageous:

    “Mike is so neoliberal and so open minded he’s banned me from his Centre for a) questioning his assumptions and b) challenging his objectivity when doing so. But ministers still listen to him because it suits their purpose to do so.”

    This from the most censorious weblogger in the field of tax, whose stated policy is to ban anyone who does not agree with him and/or impugns his objectivity, and whose views are listened to and adopted by the trade unions, because it suits their partial purposes.

  4. Going on from what Robbo says above. It is just not a burden on the private sector worker, it is also a subsidy of the public sector worker. If all corporation tax was passed on to the private sector worker as wages, then there would be a reduction in tax revenues as only a percentage of that money would be paid in income tax. Income tax would presumably go up to compensate by say 2%.

    Therefore private sector workers are subsidising the public sector by them having lower tax bills.

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