Nope, he\’s still not grasped tax incidence

Guess who:

And they want to do this so that the burden of tax is shifted from capital – business profits in this case – to labour. And this is part of the process of reallocating wealth from the poorest to the richest in society.

So what Wolseley is doing is not a politically neutral act. And nor is it all it claims – a move against regulation. This is about shifting power. From people to capital. From countries to corporations. From poor to rich.

And to prevent this we have to assert the right to tax corporations.

Sigh.

It\’s this ignorance of basic economics which leads him into such errors.

1) Corporations don\’t pay taxes, people do. The question therefore is who actually carries the economic burden of these taxes which are nominally collected from corporations.

2) There are three groups who could be carrying this burden. It could be the shareholders (ie, capital) in the form of lower returns from their investments. It could be the workers in the form of lower wages (ie, labour) and finally it could be customers in the form of higher prices (ie consumers).

3) The general conclusion in economics (please note, not neo-liberal economics, not new classical, not Keynesian, neo-Keynesian, any of the various heterodoxies, but a basic point agreed by all such schools) is that who carries it depends. And in any particular economy it depends, crucially, on the mobility of capital. The more mobile the capital the less of the burden that capital (ie, the shareholders) will carry and the more that labour (ie, the workers) will. Very few think that consumers carry a significant portion of the burden in any of the reasonable flavours of the universe.

4) We are, as in fact are most economies, small and open (there are those which are large, like the US and thus slightly less affected, there are those which are closed, like North Korea and thus hardly affected at all) meaning that capital is highly mobile.

5) The CBO in the US estimates that some 70% of the economic burden of the US corporate income tax falls upon labour, the workers, in the form of lower wages. Joe Stiglitz (Nobel Laureate recall) has pointed out that it\’s entirely possible that the burden falling upon labour can be greater than 100% of the tax raised. Mike Deveraux has asserted that this is the case in the UK.

6) The long term effects will be greater than the medium term effects which themselves will be greater than the short term ones in this shifting of the economic burden from capital to labour.

Now none of the above is really arguable. It\’s really just the straight economics of taxation and we\’ve known about this for a long time.

The one part that is arguable is whether the various estimates of the effect are correct: the CBO, Stiglitz and Deveraux could indeed all be wrong. The effect we know is correct: it\’s the magnitude which is arguable.

Now, note Ritchie\’s dreadful error in his base assumptions. That the burden of corporate taxation is actually carried by capital. We know absolutely that this is not necessarily so. We have a number of estimates telling us that this is not so….and we don\’t, at least as far as I\’m aware we don\’t (and entirely willing to be corrected here), have estimates telling us that this is so.

Simply because Ritchie doesn\’t understand economics he\’s led into this dreadful error: that we must tax corporations because this is the taxation of capital.

But it ain\’t, is it?

4 comments on “Nope, he\’s still not grasped tax incidence

  1. Murphy tries to make a case for more and more taxation, not the increase of tax income, which is why his assertions are always meaningless.

    Tax is useless unless it can be quantified and enforced, as you stated, a corporation is a “thing”, not a person, so it becomes increasingly hard to tax it.

    But, as I say, he’s just interested in new stuff to tax.

  2. I don’t know why you persist in pushing your tax incidence arguments. It is a hoax, a lobbying instrument used by shills for the City of London to try and drive down tax rates. Just as a reminder (again,) the NYT finds one of several ways to skewer your arguments:

    “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.”

    You’ve got any number of other horses to ride – why keep flogging this dead one?

  3. And no, “The CBO” does not say that at all, in any coherent way. “The CBO” also says:

    “Capital bears the majority of the corporate tax burden” and “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”
    http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf

    So the CBO doesn’t agree, or even know, what the incidence really is. And in the absence of agreement, you are back to the fundamental point made in the NYT above, which you haven’t even attempted to demolish, because you can’t.

    Tim adds: Nick, you really do need to learn how to read an economics paper. Here’s the conclusion, in it’s whole:

    “This review suggests that the assumption of an open economy is not sufficient to conclude that
    much of the burden of the corporate tax is shifted to labor. Indeed, assumptions of highly mobile capital
    and highly substitutable products, internationally, are needed to ensure that the majority of the tax is
    borne by labor. Relaxing the assumptions of perfect mobility changes the burden allocation to indicate
    that, even in an open economy, a majority of the corporate tax burden, perhaps 60 percent, is still borne
    by capital.
    In addition, concerns arise over the reliance on these empirically-based general equilibrium
    models, extensively developed as they are, because they cannot fully reflect important aspects of the U.S.
    corporate tax or the nature of global interactions with other countries. Existing evidence of the linkage
    between U.S. tax policy and that of other countries suggests, at least with regard to the burden of the
    corporate income tax, that the United States operates in more of a closed economy than these models
    assume, even with the imperfect international mobility assumptions, suggesting capital would bear the
    bulk of the corporate tax.
    The nature of these models is to measure changes in the corporate tax and may not be appropriate
    for allocating the full amount of an existing tax. Given that the worldwide corporate tax should fall on
    worldwide capital, an alternative approach to determining the incidence of the current corporate tax may
    be to allocate the worldwide average to capital and to allocate country deviations from that average as
    changes in the corporate tax, using the open-economy model’s estimates. Under this approach, more than
    90 percent of the burden of the corporate tax should be allocated to capital.
    Even when using the standard open-economy models, it is clear that minor additions of rigidity
    through immobile capital or imperfect product substitution can result in capital bearing a major portion of
    the tax. The open economy assumption should not be synonymous with the conclusion that labor bears
    more of the burden of the corporate tax than capital does.”

    Even with the new (and disputable but let’s not go there) empirical estimates she’s still saying that 40% of the burden of the corporate tax falls on labour. Further, the models she’s using are all looking out from the US: an extremely important caveat as the US is indeed some 30% of the global economy (or rather, was, when the four underlying papers were written). This of course limits the effects of the mobility of capital. If we turn around the same four source models that she is using and look at what the effects of a corporate tax upon a country which is 5%, or 1%, or 0.1% of the global economy are we’ll find, from the internal logic of those models, that much more of the burden of the tax falls on domestic labour than it does upon capital.

    All of which is implicit in the original basic insight: the more mobile capital is the less of the burden it will carry. And the smaller (and more open, but small and open are near synonyms here) the economy the greater will be this mobility of capital.

    There’s an interesting policy implication in this as well. Despite Ritchie’s bleatings about how corporations must pay tax in small and poor countries, the implication is exactly the opposite. Yes, of course, countries should charge taxes (and stiff and hefty ones too) on the extraction of natural resources: Ricardian Rents as they’re known. But quite probably no corporation tax at all.

    And yes, of course, globally the burden of taxation on capital will fall upon capital, for the globe is indeed a closed economy. But that’s not what we’re arguing about, is it?

    My suggestion is that you try to read papers before using them to support your prejudices. Or perhaps that you aswk the people feeding them to you to do so at least.

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