Ritchie on corporation tax incidence

And whilst still on corporation tax let’s put to bed that age old (well, rather more recent, actually) myth that the cost of corporation tax is largely paid by labour. This myth is almost entirely the work of Prof Mike Devereux at Oxford who studied corporate tax increases (themselves a rare phenomenon) and suggested when they occur wages paid fall. He forgot two things. First he didn’t notice countries did in the past only increase tax rates when they were in economic distress, of which falling wages are a sure sign. Second, Devereux forgot to check if the relationship he supposedly found worked in reverse i.e. did wages increase when corporation tax rates fell? Real wages have fallen steadily since 2008 and so have corporation tax rates. If Devereux had been right then falling tax rates should have boosted wages, but they very clearly have not. The evidence of any significant link between tax rates and corporate tax dates has been shattered for good. Devereux should have realised that correlation does not necessarily indicate causation.

Ritchie is rather ignoring something here. That Deveraux has provided an estimate of how the corporate tax burden is split between labour and capital in the UK is true.

But that is all that is true. Ritchie is so ignorant of economics that he assumes that the basic theory started with Deveraux: not so, it is only one paper providing one estimate.

The first four results from a Google search for “incidence of corporate income tax” (I stop there because the fifth is me).

Uwe Reinhardt in the NYT:

The earliest formal general equilibrium model, published in 1962 by a University of Chicago economist, Arnold C. Harberger, in the Journal of Political Economy, assumed a closed economy. In that model, the burden of the corporate income tax ultimately fell entirely on the owners of capital.

When the model was modified as an open economy in which capital in the taxed country can escape by flowing abroad to untaxed or lower-taxed countries, some or all of the burden of the corporate income tax shifted to labor. Under the assumption of perfect international capital mobility and perfect substitutability of imported goods and services for all domestically produced goods and services, labor would then bear the entire corporate income tax, because labor is the only immobile factor than cannot escape the tax.

The point is made before Deveraux was out of short trousers.

The Wikipedia entry:

Similarly, taxes on a business that can easily be relocated are likely be borne almost entirely by the residents of the taxing jurisdiction and not the owners of the business.

A 2005 paper from Alan Auerbach:

Finally, while exploring many extensions of the Harberger model, I have devoted little
attention to one of that model’s important omissions, the impact of corporate income taxes on
capital accumulation. But the implications are clear. For taxes on capital income, in general, we
would expect an increase in the effective tax rate on new saving and investment to reduce capital
accumulation. The resulting decline in the capital-labor ratio would increase before-tax returns
to capital and lead to a fall in wages, thus partially shifting the tax burden from capital to labor.
This analysis would apply to the corporate tax as well, but only to the extent that the corporate
income tax represents a tax on new saving and investment. The shift in the corporate tax burden
from capital to labor can proceed only if it is first shifted from shareholders.

The Concise Encyclopedia of Economics:

Modern economic opinion is divided on the incidence of the corporate income tax, but few economists today believe its burden falls entirely on the owners of capital. The latest thinking is that, since capital is mobile, it will flow to investments that produce the highest after-tax returns. The corporate income tax raises the cost of capital and reduces after-tax returns in the corporate sector, and thus leads to a migration of capital into noncorporate or taxexempt sectors of the economy. This migration has two effects: it lowers the supply of capital available to corporations, and it causes a reduction in rates of return in the noncorporate sector as capital becomes more plentiful there. The ultimate effect, therefore, is to lower returns for all owners of capital across the economy. One important result of this capital migration is that the burden of the corporate income tax, over time, shifts to workers: with a smaller capital stock to employ, workers are less productive and earn lower real wages. In a 1996 survey, public finance economists were asked to estimate what percentage of the corporate income tax in the United States was ultimately borne by owners of capital. While their answers varied, the average response was 41 percent, meaning that the professional consensus is that more than half the burden is eventually shifted from owners of capital to workers or other groups.

And the Tax Policy Centre:

In the past several years, researchers have attempted to estimate the incidence of
the corporate income tax empirically. The primary approach used in empirical papers has
been to examine cross-country variation in the corporate tax rate over time and measure
subsequent changes in wage rates. All of the recent empirical papers have found that corporate taxes lead to depressed wages, but critics have questioned the validity of the
empirical methodology. To date, there remains little, if any, consensus about who bears
the burden of the corporate tax.

That last is particularly interesting, don’t you think? Empricial papers find the very effect that Ritchie is looking for?

Or, in other words, Ritchie is spouting nonsense on this subject.

15 comments on “Ritchie on corporation tax incidence

  1. Murphy’s latest post is another example of how he will just say anything, the first thing that comes to his mind, if he thinks it supports his argument. In his blog he says:

    “You will find remarkably few people’s wages go down when employer’s NI goes up”

    Whilst in an earlier blog he says “employer’s national insurance – the whole cost of which it born by their employees.”

    So there you have it. Depending on the day of the week or which way the wind is blowing, the cost of employers’ NI is met by the employer AND the employee.

    Even when his inconsistency is pointed out to him he just blathers on ignoring it.

  2. Note the lovely comment on Murphy’s blog on this from Chris in Hastings:

    “Last, as Richard has already said, nothing from Professor Devereux and his Tax College in Oxford can be believed. They receive donations from big companies. In return for these donations, he publishes ‘research’ to say what they need him to say. Nice work if you can get it”

    Given Murphy’s active censorship of comments on his blog, I’d call that hoist by own petard, or shooting oneself in the foot for allowing this comment when you do exactly the same yourself?

    I’d post there to point this out (or attempt to) but I’ve given up trying to engage with the fat fvck and his brown-nosing camp followers.

  3. Here’s how to explain tax incidence and bargaining power. Seriously good footballers are very mobile. Football clubs are not. The best players negotiate salaries net of tax. So tax falls on the clubs, not the players.

  4. You will find remarkably few people’s wages go down when employer’s NI goes up”

    Possibly because employees’ wages are specified in their contracts net of employer’s NI. However, this doesn’t mean that if the tax goes up that there is less money in the pool for next year’s wage increase (if any.)

  5. As far as I am aware nobdy has ever claimed the incidence of CT is entirely on labour. Indeed, the concept of relative mobilities of capital and labour is taken as read these days. But then Ritchie never ever let the facts get in the way did he.

    Incidentally, BraveFart, the Courageous State has indeed this morning decided not to allow me to post my comments any more. I’m sure its motto is something like “Discretion is the Better part of Valour”.

  6. SE

    “You will find remarkably few people’s wages go down when employer’s NI goes up”: Ritchie

    You’ll find he has moved from this position somewhat.

  7. Are you a troll as well, or just a time-waster? I’m not sure which I am, he’s called me both 🙂 As well as simply deleting stuff without saying why…

  8. Apparently I’m a neoliberal.

    And yes, deleting stuff he can’t answer does seem to be his modus doesn’t it.

    P.S. In the same way that he is annoyed by the “lazy” way all lefties get labelled Marxists, I am annoyed – as I’m sure you are too – that he doesn’t distinguish between trolling and my gentle, friendly, discursive style.

  9. He doesn’t seem to like me asking a question and then following up on his reply. I think he considers that any reply he gives – such as “No it’s not” – should be the end of the matter.

    It makes me wonder why his blog is open to comments at all.

    I think in a way he has a point about trolling, in that the term broadly means making statements to wind someone up, and I suspect that our statements do indeed wind him up. But what he misses is that trolling is about making statements solely to wind up, whether you believe them or not, and that is most definitely not what I do.

    But hey ho: ignoring an aspect that doesn’t suit his purposes in order to make the claim he wants is not entirely unknown in Mr Murphy – which rather makes me feel that he is trolling, sometimes… 🙂

    Although I do suspect that he doesn’t accept that anyone can genuinely believe something that he disagrees with – disagreement comes from error at best, and ulterior motives at worst – so maybe from his point of view I must be insincere and therefore trolling. Poor chap, to have such a distorted worldview.

  10. Remember that unpopular fat kid at school who said he was good at chess, went on and on about how good he was and then when you sat down and played a game with him he turned out to be terrible at it and when you’d taken all his pieces and he only had his king left he knocked the board over and ran off crying, then came in the next day and said he hadn’t really lost because he hadn’t resigned and you hadn’t check-mated him? I think he said he wanted to grow up to be a crusading tax campaigner.

    Wonder what happened to him.

  11. Ironman

    My guess is that you were deemed to most contravene (inter alia) this comments policy criterion:

    5. Persistent comments from those promoting libertarian ideals far removed from the political mainstream.

    That probably makes you a far right conspirator considered by him to be in the same mould as Ayn Rand.

    From my observations there are a few sure ways to ensure your comment is accepted:

    1. Post only sycophantic uncritical praise

    2. Tell him you are tweeting his blog

    3. Be identifiably from a left wing pressure group, organisation, political party, or be in a social-funded occupation

    4. Express hatred for Conservative politicians and policies

    Ideally you should combine all 4 (“Ivan Horrocks” seems to do this most regularly).

  12. He is as sensitive to criticism as a princess with many mattresses between her and the pea. I have been deleted and effectively banned under many names and with much ip spoofing effort, even when I pretended to praise him in loaded language.

    I’m telling you lot Murphy is smarter than you think. He makes a damn fine living as a con man telling lefties the fairy tales they want to hear.

    I have come to admire him. It is immoral to let a sucker keep his money.

  13. @ Pellinor
    I have established that he *can* accept that someone can genuinely believe something that he disagrees with – I have more than once challenged him to tithe his income (he periodically claims to be a Christian) and encourage his readers to do so. He flatly refused but made no attempt to deny that many (?most) Christians do believe in tithing nor that they do so.

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