I\’ve had a response to an earlier post from John Christensen of the Tax Justice Network. Essentially, he takes issue with my contentions about tax incidence: the idea that just because a company is handing over a cheque for corporation tax, it doesn\’t mean that it\’s the corporation bearing the burden of that tax. Here\’s what he says:
I am an economist. The idea that the tax incidence might be shifted, in some circumstances, from shareholders to workers or consumers, is based on very specific assumptions relating to the nature of the economy in question (i.e. it is a closed economy), the structure of the labour force (full employment is assumed) and the capital market (assumed to be perfectly competitive). Back here on planet Earth, we recognise that these assumptions don\’t apply, and the model is merely an exercise in academic guesswork. In real life very economies (other than North Korea) operate as closed economies, and companies do pay tax on behalf of their shareholders: hence the huge effort made by the corporate sector to avoid paying taxes and lobby for tax breaks. Greetings from planet Earth. John
Note please that he insists that such shifting of the burden depends upon it being a closed economy.
Here is the Congressional Budget Office on the subject:
This study applies a simple two-country, five-sector, general equilibrium model based on Harberger (1995, 2006) to examine the long-run incidence of a corporate income tax in an open economy. In equilibrium, capital is assumed to be perfectly mobile internationally in the sense that the country in which a real investment is located does not matter to the marginal investor. In addition, each country is assumed to produce at least some tradable corporate goods for which the country cannot affect world output prices. Like the original Harberger (1962) model, the worldwide stock of capital and the supply of labor in each country are fixed. Under those assumptions, the model provides closed form solutions and easily understood predictions about its comparative static equilibria. As with any simplified model, the analysis is silent about some potentially important issues – such as the effect of the corporate tax on savings, growth and other dynamics – that may also have important effects on corporate tax incidence.
We are, of course, still using a model, but we\’re certainly not assuming a closed economy. Their finding?
Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden. Domestic landowners receive a small benefit. At the same time, the foreign owners of capital bear slightly more than 70 percent of the burden, but their burden is exactly offset by the benefits received by foreign workers and landowners.
John, given that the assumptions you make about the model are wrong, might you want to address this issue of tax incidence again?
As to the rest of you, well, make up your own minds. You want to believe a buddy of Richard ("tax is not a cost") Murphy or the Congressional Budget Office?