Ritchie on the incidence of the corporate income tax

It has genuinely been fascinating to spend the last two days discussing international tax and it’s relationship to the funding of developing countries over the last two days at a workshop at the Institute of Development Studies at the University of Sussex.

There is one assumption that we all seem to share is that corporation tax is an essential part of the tax system and as far as I can tell that is because the belief is widespread that this tax is paid by the companies themselves and the incidence of the tax falls on capital.

The problem with this is, of course, that it’s simply wrong.

This is an excellent little primer on what is actually going on.

But economics professors quickly add that all bets are off in the longer run, when the company’s capital stock relative to the input of labor can change and when the owners of investable funds can decide whether to invest their money at home or abroad or in enterprises not subject to corporate taxation.

General-equilibrium models accommodating this wider view of the economy and the longer run go much beyond the compass of a freshman course and show that who actually pays the corporate income tax — the owners of capital or labor — is driven by a number of factors in complicated ways that elude simple intuition.

Essentially, the smaller the economy in relation to the world economy, the more mobile capital is (and the less mobile labour is) then the more the tax falls upon said labour, not capital.

Exactly how much falls where in which circumstances is indeed debatable. That these are the factors which change that incidence is not.

So we’ve Ritchie’s (and the various other tax campaigners) usual basic problem in evidence here. If there’s a piece of economic knowledge they don’t like then they ignore it. This leads, sadly, to their proposing actions that are entirely counterproductive to their declared aims:

Worse, those developing countries that are much more heavily dependent upon corporation tax as an income source than developing countries (and that is most of them) will have that opportunity undermined because, as is still all too obviously the case, shifting profits to low and no tax states is all too easy.

In both cases the outcome of an abolition of corporation tax would be a shift of the tax burden onto those less able to pay, or the denial of services to those who really need them, and for whom they are absolutely essential.

Developing countries are, by definition, small economies in relation to the global one. And quite obviously we’re also talking about mobile capital here: it’s the multinationals they want to tax. So, we know that in such economies more of the corporate tax incidence falls upon the workers than in larger and richer economies. So, Ritchie and pals are actually advocating increased taxation of some of the poorest workers in the world: while declaring that they advocate this in order to tax capital. And they manage this feat by either being ignorant of, or deliberately refusing to acknowledge, basic economic facts.

It’s just not a great way to run a planet really.

7 comments on “Ritchie on the incidence of the corporate income tax

  1. If all that is the case then surely it doesn’t matter either way? Either you tax the corporations and the tax incidence falls largely on the workers or you tax the workers and – er – the tax incidence falls largely on the workers.

  2. Is the point if your goal is to minimise the amount of “avoidance” then you wouldn’t tax companies? I would imagine that they have higher resources to deploy on legitimately reducing their tax bills.

  3. Poor old Richie
    If he was going to organise himself a post Christmas jolly, you’d think he’s do better than two days in Sussex. Week ̶s̶k̶i̶i̶n̶g̶ at a tax conference in Switzerland at least.

  4. What happens to Tax Research if:

    1) there were no corporation tax (and therefore no avoidance to campaign against)?

    2) it was discovered that the incidence of corporation tax fell substantially on workers (so his recommendations to the TUC harm the workers rather than help them)?

    Ritchie is not a disinterested commenter on the subject.

    The ongoing taxing of companies attracts both bootleggers and Baptists. Which one is Ritchie? I used to think the latter, but now it could be the former.

  5. Two observations on Ritcie (actually there are amny observations on Ritchie, but two to be going on with):

    1. Corporation tax is good he says because the incidence is entirely on Capital. Leaving aside the fact that this the incidence is variable and circumstance-dependent, this is the end-point of his argument: we want to tax capital because capitalist are evil bastards. Pure undilted if unacknowledged Marxism.
    2. The alternative suggested by Tim is to the tax distributions at the marginal rate appropriate to the recipient (JamesV, does this answer your question?) In which case the incidence is…entirely on Capital. So why doesn’t Richard murphy, who is after all a TAX EXPERT, start to campaign for this?

  6. Ironman @2 – doesn’t really answer my question. Because the marginal rate on return to capital depends on where the capital owner resides.

    So say yer domestic capital owner faces a 40% marginal rate – you tax his capital gain at that rate and then let him off the income tax (or don’t tax the gain at source but rather the income). Then you have the problem that you are treating yer foreign capital owners more or less favourably, by picking his marginal rate (and this only works at all if he lives somewhere he gets relief for the tax you charged, if not you basically have to not tax him).

    The problem is that profit taxes reduce inward investment whereas it turns out that labour will tolerate very large impositions of tax before it starts emigrating or storms the president’s palace armed with pitchforks.

    But if global mobility of capital really does mean that corporation taxes are paid largely by the workers, then there is no reason to favour taxation of labour over corporations, or vice versa. Other than that appearing to tax big bad evil multinationals (who as we know are anyway adept at minimising their tax exposure) rather than the downtrodden masses while you are, actually, raising hidden taxes on the downtrodden masses, is politically astute.

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