Upon the incidence of corporation tax

Ritchie faces up to the fact that the incidence of corporation tax is a little more complex than \”companies pay it so there!\”.

Which is, it has to be said, an advance on his earlier thoughts on the subject.

The argument is whether the tax is paid by corporations themselves, their owners, their employees or someone else – for example their customers. This is an issue to which I will be returning quite soon – because it has some significance for the recent reviews on some aspects of corporation tax recently announced by HM Treasury. Suffice to say I take the view that all these outcomes are possible – which puts me in marked contrast to those from the political right who argue that corporations can never pay tax and as such should not be taxed (although they’re rarely quite so bold as to specify it quite like that – but there’s no doubt that’s what they seek).

No, the one set we know to not pay the tax are the companies themselves. For they simply cannot pay a tax: there\’s no \”there\” there to pay one. Both St Cable of Vince and Larry Elliott are with me on this one.

It must be some combination of shareholders, employees or customers.

As such it was good to see that the NYT blog was conditional in its conclusions. It said that if a corporation tax was charged in a closed economy then the charge would end up being paid by the owners of capital – whether by reducing the retained earnings of the company or by reducing distributed earnings.

This is true. In a closed economy the burden of a business profit tax will be carried by the providers of capital: shareholders in the case of a corporation, just as it would be partners in a partnership.

On the other hand in an open economy – one without capital controls and where trade is wholly or largely unregulated- then it is possible that the charge can be transferred onto labour.

Not quite. It\’s not quite just the legal restrictions upon the movement of capital and or trade. It\’s the actual openness…modified by all sorts of things other than legal openness. In a 100% open economy, one where national boundaries made no difference at all to how and where capital was invested and where adjustment was near instant to changing incentives then 100% of the burden would be (not \”can be\”) transferred to labour.

But we know there are many things which make, even in the absence of any legal restrictions, capital not entirely and wholly openly liquid. From Adam Smith\’s observation that merchants prefer the domestic to the foreign trade to language and cultural difficulties and so on.

Which is why all of the estimates of how much of the burden falls upon labour even in the most open economies are less than 100%. It\’s not just the law that matters.

We can also turn that around and point out that even where the law does insist upon a closed economy such taxation will not be 100% be borne by capital simply because there will always be those willing to break the law: as there were indeed back in the days of capital controls. Please note that this not is condoning the breaking of the law (despite my personal conviction that it is immoral of the government to tell people that they cannot take their own money elsewhere), rather, just pointing out that we do, when designing any system of anything, have to consider the effect of the scofflaws. As examples, the illegality of drugs certainly and prostitution possibly create vastly worse results precisely because of those scofflaws and the black markets that grow up around them than an acceptance of such damage and a controlled legalisation would do.

So, as I say, we need to consider, even if we do not approve of, the costs of law breaking.

But these are rather quibbles when we get to Ritchie\’s new idea:

The reality is that we do, of course, live in open economies. But the fact is that tax has, by and large, sought to create the environment of a closed economy whilst allowing free trade so that the benefits of tax being charged on capital can be secured at the same time that trade can take place. This was the underlying direction of travel of a great deal of tax policy for the last thirty years, and rightly so.

This is now in danger. The important combination of residence based taxation, controlled foreign company rules, the taxation of dividend income from overseas subsidiaries and the application of strict transfer pricing rules was not chance: it deliberately created a closed economy for tax. Dismantle any one of those elements and an open economy for tax is created. This appears to be the objective of the ConDem coalition government – and it is profoundly dangerous. It might remove forever the chance to tax capital.

Err, no. Do you see what he\’s done there? Yes, exactly, he\’s begged the question, a marvellous case of petitio principii. He\’s gone from \”taxing corporations in order to tax capital\” to \”tax capital\”.

The argument we\’re trying to explore is not whether we should tax capital it\’s whether taxing corporations is a useful method of taxing capital.

That may be what the Tories and the Orange Book Liberals want – because it ensures that a whole raft of funding for government is eliminated for good – but the result is either a massive increase in the taxation burden of ordinary people or a loss of well being on their part.

Which of course is nonsense: for we\’ve all already agreed that the open economy bit means that the burden of corporation tax is largely borne by ordinary people (some 70% of it is according to the CBO, more than 100% according to Mike Deveraux, someone who Ritchie will never agree with)….even under this \”closed tax system\” that Ritchie insists that we currently have.

My assumption is that he\’s preparing a report for someone or other and is desperately trying to find some logical justification for insisting that corporation tax really is paid by rich bastards so that\’s OK then, despite all the economists who talk about the economics of taxation disagreeing with him.

9 thoughts on “Upon the incidence of corporation tax”

  1. Even if it were true that “corporation tax really is paid by rich bastards” the rich bastards in question are probably just poor bastards’ pension funds.

  2. Brian, follower of Deornoth

    I wrote out a cheque for corporation tax yesterday, and I can assure you all of it was paid for by the workers in my company (namely, me).

  3. Ditto what Brian said. And although my accountant says it’s the company that pays, it still pains me when I have to sign the cheque

  4. Your blog is such a nonsense that it’s hard to know where to begin. Let’s get one thing out of the way first. You do know, don’t you, that this whole “corporations don’t pay tax” incidence argument is a hoax, a trick? Dont you? The NYT blog that was the basis of his arguments puts it quite neatly.

    “Given that even economists cannot agree on who actually bears the burden of the corporate income tax, why not abolish the tax altogether and instead tax human beings directly? The arguments against such a move are twofold.

    First, even bringing in only 12 percent or so of total federal taxes, the corporate income tax represents the third-largest source of federal revenue and could not easily be replaced with an alternative source, especially in these times of fiscal pressures.

    Second, if the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.”

    It’s that second part that reveals the hoax, propagated by shills for the financial services industry on behalf of the owners of capital.

    But the individual parts of your blog are wrong too. You singularly fail (I wonder why) to point to the CBO study that says: “even in an open economy, capital could bear virtually the entire tax burden and that the open-economy assumption is not sufficient to shift the burden of the corporate tax from capital to labor.” Yes, that’s a “could” in the summary but the rest of the document makes the point clearer.
    http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf
    So if you’re going to say “the CBO says” in support of your arguments, then you are not telling the truth.

    Your “Err, no. Do you see what he’s done there? ” fails to make the point. Read it again, and see what I mean. CFC rules and so on really do create closed-economy kind of conditions from a tax perspective, which means (by your own admission about the closed economy assumptions) that your incidence argument falls apart.

    Moreover, you fail to apply your incidence argument to the question of Ricardian rents, where only the foolish argue that they should go untaxed. And the incidence argument in that case falls squarely on the owners of capital.

    I could go on, but I don’t have time. In short, your blog — and your entire argument about “incidence” falls apart on close analysis. It is a hoax perperated in order to get governments to slash corporation taxes, so as to create new kinds of tax shelters.

    Tim adds: You’re not very good at this, are you? The first two arguments boil down to, even if companies don’t bear the economic burden it’s still a convenient place to collect the taxes from. Neither of those arguments address the incidence argument at all.

    Secondly, I do indeed point out exactly what the CBO is saying about that “could”. Note the bits about even in the absence of legal restrictions capital is not 100% liquid etc. That’s making exactly the same point that the CBO report is. (BTW, we should note that this is not an “official” CBO report. This is a working paper (ie, not peer reviewed) by an individual economist representing her own views, not those of the CBO. She just happens to work there. This is not “ex officio” from the CBO.) Rather more official papers trying to measure, empirically, the incidence can be found here:

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2010/04/corporate-tax-incidence-some-evidence.html

    Further, I don’t say that CFC rules do not create a closed economy for tax (although I do have my doubts, that’s not what I said). What I say is that Ritchie has moved from considering whether corporation tax incidence falls upon capital to whether CFC rules enable the taxation of returns to capital. You do understand that these are very different points, don’t you? One is “does this tax fall upon capital” and the other is ” can we tax returns to capital”. Very different indeed.

    And you’re absolutely correct that I don’t mention Ricardian rents. Because that again is a very different question. This part of your argument is saying “your wrong about the incidence of corporation tax because you don’t mention kittens, thus your argument is invalid”.

    So, let us just remind ourselves of the current state of play about corporation tax. This is the bit that everyone except Ritchie (those agreeing including Vince Cable, Larry Elliott, the CBO, me, Chris and so on) agrees with. Some portion of the corporate income tax falls upon capital because, even in a legally totally open economy it still isn’t true that capital is perfectly mobile. Similarly, in an open economy, whatever share of the corporate income tax which is not carried by capital must be carried by either labour or consumers: the general conclusion is that that part not carried by capital is carried near exclusively by labour.

    Estimates of how that burden splits vary: there’s a CBO paper (an official one, not a working paper) which says that for the US it’s 70% labour, 30% capital. Mike Deveraux has suggested that in hte long term it’s over 100% for labour in the UK (we’re a smaller, more open economy so the effects will be different). Feel free to go find your own papers giving different empirical results.

    Finally, the argument for the abolition of the corporate income tax is not actually to do with its incidence at all. It’s a dual one: firstly, that capital and corporate taxes (as the OECD has conclusively proven) have, for the money raised, a much larger effect upon future growth than income, consumption or property taxes. There is therefore a free lunch available: reduce taxes on corporations and capital and raise it on property or consumption and for the same amount raised for the State’s running costs we can have higher future growth.

    The second is that corporation income taxes are hugely expensive to collect. The combination of the work that must be done to calculate them and the efforts that are put into minimising them are such that, according to some estimates at least, we lose more from the economy than that taxes themselves raise.

    I really don’t mind you having a go at me because I disagree with Ritchie. I just wish you wouldn’t try using his logical methods when you do so…..or his lack of them rather.

  5. As a leftie/bleeding-heart liberal I have never understood the need for corporation tax.Surely if a company is awash with cash its owners and beneficiaries are susceptible to Income Tax , (not that I’m very keen on that either being original Labour i.e.keen on Land Value Tax .Which Mr Murphy notably is n’t and Mr Worstall definitely is.So there you go)

  6. Your “you’re not very good at this” is a cheap attempt to discredit someone who disagrees with you. But when you say something like that, you need to be sure of your ground yourself.

    I note, first, that you haven’t addressed the “hoax” element of my argument. It is a hoax, whose subtext is that we should cut the corporation tax to zero.

    Your point about Ricardian rents via kittens is a neat attempt at deflection, but it is a bogus argument. We all seem to think that land value taxes are an excellent idea and could be usefully used to subsidise tax cuts elsewhere (referring to DBC Reed’s point.) Well, yes, good. Broaden this out to the question of rents (think of it in terms of a U.S. oil company producing in Africa, say) and you will find that corporation taxes are a very good idea, not least because the “burden” falls on wealthy Texans, not poor Africans. (You could engage in sophistry and argue that government profit oil shares, for example, aren’t really a “tax” but that would be, well, sophistry.)

    Then there’s the question of who “labour” is. I wonder what that means in the context of, let’s say, Goldman Sachs.

    Corporate income taxes are, very often far easier and less cumbersome to collect than chasing millions of people for their taxes – that’s why poor countries rely on them quite heavily, because it’s so hard to go out and beat up their own citizens in their millions to squeeze their taxes out. Far easier to take the taxes out of a place where the money is centrally collected.

    Taxing corporations being inefficient? This is a hugely contested area, in fact, and we can all produce evidence or at least suggestions that our point is right. So you think we should stop taxing banks, for example, and tax consumers instead, puffing up the financial sector further and increasing the TBTF problem, while increasing inequality – in itself a highly destructive phenomenon? One could carry on these arguments forever.

    Nobody will agree on what share of corporation taxes fall on capital vs. labour. So then we are left with that basic truth – that your argument about tax incidence – at least if the real subtext is considered – is a hoax.

    Tim adds: No, you’re really not very good at this.

    “Your point about Ricardian rents via kittens is a neat attempt at deflection, but it is a bogus argument. We all seem to think that land value taxes are an excellent idea and could be usefully used to subsidise tax cuts elsewhere (referring to DBC Reed’s point.) Well, yes, good. Broaden this out to the question of rents (think of it in terms of a U.S. oil company producing in Africa, say) and you will find that corporation taxes are a very good idea,”

    No, the taxation of the Ricardian Rent comes through the payment of royalties. Charged everywhere. Very good things too but they have sweet fuck all to do with corporation tax.

    “Corporate income taxes are, very often far easier and less cumbersome to collect than chasing millions of people for their taxes – that’s why poor countries rely on them quite heavily, because it’s so hard to go out and beat up their own citizens in their millions to squeeze their taxes out. Far easier to take the taxes out of a place where the money is centrally collected.”

    You haven’t been reading the briefing sheet properly. This is the argument in favour of tariffs on imports and exports as sources of revenue. As Ritchie keeps saying poor countries don’t have sufficiently sophisticated tax collection systems to actually go get corporation tax. That’s what all this campaigning about country by country reporting and all the rest is about, see?

    “So you think we should stop taxing banks, for example, and tax consumers instead,”

    No, the point about tax incidence is that *we’re already taxing workers* by taxing companies because the incidence of the corporation tax falls mainly upon labour. So, what we’re really saying is, let’s be open and honest about this. Instead of disguising it all as just free money (“Hey, don’t worry! It’s just business that pays these taxes!”) let’s tell the truth.

    Or is truth something not allowed in your world?

  7. Sigh. This could go on interminably. To save time, I’ll merely make the point that you still haven’t addressed the fact that your argument, along with its subtext, is a hoax and a trick. It is, isn’t it?

    Tim adds: Nope, no trick or hoax here. That was over on Ritchie’s post if you recall?

  8. You simply haven’t addressed the “hoax” problem. “Nope” doesn’t do it. Let me be clear about it. First, the subtext of the incidence argument is that we should slash corporation taxes, hopefully down to zero. Hence the hoax. To illusrate that, I shall simply cut and paste from the NY Times:

    “If the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.”

    There.

    Tim adds: No, the subtext of talking about the incidence of the corporate income tax is to battle the untrue assertion that it is paid by companies. Then to combat the untrue assertion that even if it isn’t paid by companies then it’s paid by shareholders and thus is progressive anyway.

    The corporate income tax, if it is borne by the workers, is not progressive, is it? And thus should not be defended on the basis that it is progressive. Which Ritchie, the starting point for all of this, insists it still is.

    That corporation tax should be abolished is an entirely different set of arguments as I’ve already laid out.

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