Tax Incidence Again

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?

10 thoughts on “Tax Incidence Again”

  1. Suppose that the tax incidence is not shifted from shareholders to workers or consumers. It still leaves company taxes being a lousy idea, since you should obviously instead tax the shareholders directly, thus imposing suitable tax rates variously on charities, widows and orphans, and cigar-puffing, top-hatted, champagne-swilling rentier swine.

  2. “cigar-puffing, top-hatted, champagne-swilling rentier swine.”

    You left out the waxed moustaches.

  3. Lord, what a gruesome lot the TJN are. At root the only idea they have is; Everyone, companies and individuals, should pay more tax.

    Any system that can currently – and even more so after tomorrow – take more than 50% of each additional pound earned can never b e just.

  4. “The idea that the tax incidence might be shifted, in some circumstances, from shareholders to workers or consumers,”

    It’s not that taxes on business ‘might be shifted’ – that’s a sleight of hand argument, typical of the TJN shysters – but that although the Company Finance Director might sign the cheque to the Revenue, the funds to back the cheque have come from employees, customers, suppliers and shareholders and nobody else.

    The fact that they don’t recognise this tells you all you need to know about them. Marxists , the lot of ’em.

  5. cigar-puffing, top-hatted, champagne-swilling, tache-twiddling, servant-girl-bonking, monocle-manipulating rentier swine

  6. I wonder if any of these fools thinks that lease on buildings and purchase of raw materials are not paid by customers. Tax is just another line in ‘cost of sales’.

  7. I reckon a psychologist would have a field day examining the people behind TJN. They were obviously abused or bullied by rich kids at school. Either that or they’re evangelical types with a passion for train spotting and collecting used bus tickets.

  8. To be fair, the Tories are just as stupid. They have often said that higher Council Tax and Stamp Duty Land Tax ‘hit the first time buyer’ when quite clearly the taxes are borne by the vendor.

    In the case in hand, corporation tax is basically income tax paid on behalf of shareholders. If this rate were the same as flat-rate income tax deducted from salaries, we would arrive at a least-worst position.

    To argue that corporation tax hits employees is stupid as well. Seeing as employees work for their net wages, an increase in income tax means that corporate profits go down, so it’s six of one half a dozen of the other AFAICS.

    And neither tax is as bad as VAT.

  9. BlacquesJacquesShellacques

    Mr. Wadsworth, you are wrong. I don’t know what you do for a living but I run a small building and development company, in, you know, the real world, like.

    I assure you I do everything in my power to pass on all my costs and a huge profit to all of my business associates including both employees and customers. Only an idiot would do otherwise, whataya think I do this for, my health?

    Often I am successful in passing on costs, including taxes and tax increases, to the employees. I don’t lower wages to a particular employee., but I raise them as little as possible and sometimes I lay off an employee and hire new ones at lower rates.

    I would far rather pass on costs to staff than customers. Did I read somewhere that the costs get allocated between staff and customers 70-30? That seems about right to me. Staff have much less power than customers, who can go elsewhere more easily than staff.

    Do you people have any idea of how a business really runs, or do you make this stuff up out of moonbeams and thin air?

  10. Mark, I normally agree with you 100% but I fail to understand this. Can you explain why “quite clearly the taxes are borne by the vendor.”? In simple words please, I’m just a simple tory!


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