A lesson for Richard Murphy

Briefly put, higher corporate taxes reduce the after-tax rate of return on investment, and this in turn reduces investment, employment and income below what they might otherwise have been.

Of course, we might be prepared to pay this price if increasing corporate taxes reduced inequality, and there are apparently people who believe that this is in fact the case. As far as I can tell, this argument goes along the following lines:

  1. Corporate taxes are applied on profits.
  2. Profits go to capitalists.
  3. Corporate taxes are paid by capitalists
  4. Capitalist = rich person, therefore
  5. Corporate taxes are paid by rich people

The first two statements are of course true, but everything else is wrong:

15 thoughts on “A lesson for Richard Murphy”

  1. He’s absolutely right on point 3. He’s absolutely wrong on point 4: while a retired schoolteacher isn’t quite Scrooge McDuck, people with substantial financial assets, which includes people with pension funds, still skew *way* towards the top of the wealth scale.

  2. While this statement “higher corporate taxes reduce the after-tax rate of return on investment, and this in turn reduces investment, employment and income below what they might otherwise have been.” is largely correct, there’s another argument that says ‘all taxes come out of rents’.

    i.e. for a given total amount that a business can ‘invest’ (in a particular country), if the cost of elastic inputs goes up, then the balancing figure, the amount it can pay in rent (or purchase price) goes down.

    Or to put it another way, it was reported that hosue prices in Switzerland had risen recently – not because their taxes have gone down, but because taxes everywhere else are going up, so the premium that [wealthier] people are prepared to pay to live there goes up, so house prices there go up.

    Or to put it another way, now that e.g. retailers are doing badly, we would expect to see rents adjust downwards to compensate (which they have to some extent, and commercial property values have plummeted accordingly).

  3. The question of who pays a particular tax seems rather redundant to me. Consider a sales tax. Who is paying it, the retailer or the customer? If you tax property rent, is it paid by the rentier or the tenant? If you tax inheritance, who pays it, the corpse or the inheritor? If you tax wages, who pays it, the employee or the employer? A book-keeping fiction that you have been “paid” £300 and “taken home” £200 is no different to saying that you have been paid £200 and the employer has paid a tax of £100.

    It’s a bit of a canard really, saying that capitalists don’t pay the tax. All you can really say is that all taxes extract money from trades, and who is paying it is meaningless. Which of the persons involved in the trade pays the tax is a rather meaningless question.

  4. Taxes mean you get less of something
    If you tax land-cost then you just get lower land costs, not less land.
    If you tax comparative advantage then you get less economy.

  5. As I said, it can equally be seen as a tax on the employer proportionate to his labour costs, that happens to be written on the employee’s wage slip. Especially so under PAYE, in which the employee never gets anywhere near the money he has supposedly paid in tax.

  6. To elaborate; suppose I employee Alice, and in so doing increase my company turnover by £400 per week. I set her wage at £300, and she pays £100 income tax. Thus she is only earning £200 per week, so we know that Alice is prepared to work for £200 in the current market. Now if there were no income tax, we cannot know who would have got the £100- whether I would have kept it as employer, for profits or investment, or whether Alice would have negotiated a higher wage, and received it herself. All we can say is that £100 per week has been lost from the productive economy. Whose £100 it would have been, we cannot know.

  7. IanB, good stuff on legal and economic incidence of taxes (which is why it riles me when they say that Employer’s National Insurance makes employers pay for worker’s welfare). Either way, you end up with lower net wages, higher cost to employer, and less employment/economic activity.

    Now maybe you’d like to address AC1’s point.

  8. As the poet said . “Who the fuck is Alice ? “ No-one I know .When income tax goes up the salary bill for a Company does not go up Ian .You imagine there is a simultaneous renegotiation of salaries rearrangement of lives and daily re hiring of all employees , there is not ,outside an text book , and even if there were ,competitive pressures on the Company will not allow it to pass on costs. It is possible (although I see no evidence for it ) than under laboratory conditions eventually all the stickiness would be resolved and the Company would bear the costs equally or the wider sector . During that time the cost of the tax has been born by the individual.
    Your mention of PAYE is irrelevant and paradoxically your fiction of markets in Labour works better when the employee is acting as are relatively free agent as in the Building industry where most are employed on a sub contract basis usually as Bona Fide Subbies ie self employed people. Under those circumstances if the swill of BFSC`s qualified as lets say , demo gangs all demand more that cost might be quickly incorporated in the contract . In reality even here it does not happen , because they are not working at walk away rates but you have a better stab at it .

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