Skip to content

On that corporate income tax incidence thing

One of the things that I\’ve been ragging Ritchie about is his insistence that corporations and companies do so too pay tax. I say they don\’t, that it\’s some combination of workers, customers and shareholders that do.

When I present something that show sthat economists are absolutely certain about this he usually mutters something about it being absurd, blackboard economics, doesn\’t happen in hte real world. His true bile is reserved for a paper by Mike Deveraux who indicated that the workers\’ loss could be more than 100% of the tax rasied from the corporate profits tax.

Deveraux isn\’t to be trusted as he\’s just a shill for the bosses apparently.

So this is interesting:

As a theoretical matter, it has long been understood that it is nonsensical to say that businesses bear tax burdens (see, for example, Seligman 1899). The burdens created by business taxes must be borne by individuals, including shareholders and other owners in the form of reduced after-tax returns, workers in the form of lower wages, and customers in the form of higher prices.

Atkinson and Stiglitz (1980) drew attention to the possibility that using Harberger’s (1962) celebrated tax incidence model, corporate income tax burdens might be borne more than 100% by workers, whose wages could fall so much in response to the reallocation of resources triggered by the corporate tax (reduced corporate output and greater non-corporate output) that owners of corporations actually could come out ahead. So the identities of those who bear the burdens of business taxes depend very much on economic circumstances. These circumstances are potentially discoverable with empirical analysis.

The whole paper is actually as it\’s an empirical study of who really does bear the burden (and very interestingly done as well. Almost Levittian in the way they seek out the data set which allows them to test their hypothesis).

But do note that \”Stiglitz\”. Yup, the same Joe Stiglitz who gained the Nobel. The (lefty) Nobel Laureate who says that it is at least possible that the corporate income tax diminishes the workers\’ wages by more than the revenue raised.

Something which, if true (and the references to that paper allow a lot more investigation), means that the corporate income tax is not progressive. It is actually regressive and thus we\’d do well to abolish it really.

1 thought on “On that corporate income tax incidence thing”

  1. There’s an equal and opposite argument to say that as workers work for their net wages, that the entire income tax and National Insurance burden is borne by the employer.

    So putting the two arguments (each of which only looks at half the equation) together, workers pay the shareholders’ corporation tax and VAT; and shareholders pay the workers’ income tax and National Insurance.

    This is clearly nonsense.

    As corporates are merely collections of indidivuals, and workers and customers are also all individuals, the commonsense and overriding rule must be that the entire tax burden (corporate or personal) is borne by individuals; quite who suffers from the incidence of any particular specific tax is nigh impossible to say.

    The only reasonable comparison you can make is by how much any particular tax reduces economic activity, or makes an activity (which would be viable in the absence of taxes) unviable.

Leave a Reply

Your email address will not be published. Required fields are marked *