What this is really showing is that our Professor of Practice in International Political Economy doesn’t understand the economics of which he is a professor:
The IFS is showing its political colouring in reaction to Labour’s corporation tax plans, suggesting that:
All taxes are paid by people and corporation tax is no different. Higher rates can reduce the returns to company owners (shareholders), but there is also evidence that a significant share of the burden is passed to workers in the form of lower wages.
First let me make the obvious comment that has to be said that only economists, living in their own fantasy worlds, could make a comment so obviously factually wrong. That’s because companies are separate legal persons, distinct from people. And as a matter of fact only they can pay the corporation tax a company owes, so this statement comes from imaginations that cannot face legal (and practical) reality. It is a myth that undermines the credibility of economics, but which far too many economists propagate anyway, that companies are just collections of people when in reality they legally exist, are distinct from their owners and do change the actual taxes due, how the income is categorised, the rate at which taxes are paid, where they are paid, when they are paid, who pays tax as a consequence, and that they also disguise who those who should pay tax might be, sometimes deliberately. The economists’ myth is dangerous in that case because it ignores reality and means that much of what they say on this subject is deeply flawed, as is the case with this IFS statement on Labour.
Second, if companies thought their workers paid their corporation tax for them there is little doubt they would give up tax avoidance overnight. They don’t.
Third, if corporation tax was paid by workers we should have seen a significant impact on real wages that should have increased as a result in recent years. We clearly have not.
So, fourth, the IFS is then relying, I suspect, on a study by Mike Devereux at Oxford University that claimed that this link with wages was found. But I think that study is flawed. It only looked at corporation tax increases, and that is a false sample base: if the relationship is true the hypothesis should also have been tested for cuts, of which there were many more. Then as I recall the study was not corrected fir the fact that most corporation tax increases arise during periods of economic stress in a country and unsurprisingly at these times wages tend to fall. So a correlation was found, but I am certain causation was not established. What was found were two consequences of economic downturns. They are not related.
The IFS still trots this stuff out though, maybe because it is so costly linked to Oxford. It should be more questioning, and stop using absurd assumptions, like the fact companies do not really exist, that have no relationship to the real world. It likes to think it is credible. It isn’t when it says things like this whilst ignoring the glaringly obvious fact that the people who might know – those who run companies – very clearly think shareholders bear the burden of corporation tax. They are very largely right in the main, one major exception being noted, which is that in the case of monopolies like water the customers undoubtedly do pay the company’s tax.
He’s really just not got it.
Firstly, yes, of course, all taxes are paid out of the wallet of some live human being. There’s only us here to pay taxes. Inheritance tax reduces the amount that people inherit. Employers’ NI, as even Ritchie agrees, reduces wages paid. In a closed economy shareholders pay corporation tax in the form of collecting lower profits. In an open economy corporation tax will mean less investment in said economy. Average wages are determined by average productivity, less investment means lower productivity and thus lower wages.
Note that the shareholders in the company being taxed pay some of the burden – something we can derive from Adam Smith’s only mention of “invisible hand” in Wealth of Nations in fact. Some people just will invest only at home just because they prefer to do so. But it is all workers in the economy, not just those in the company paying the tax, who bear the other part of the incidence. And the smaller the economy relative to the global one, the more mobile capital is, the more that it will be the workers not the capitalists.
Mike Deveraux’s work was an attempt to quantify this, not an attempt to make this basic case. Deveraux’s quantification could well be wrong. I think his initial estimate of more than 100% was myself (by the way, it’s Tony Atkinson and Joe Stiglitz who showed that incidence can be greater than 100%). His second and lower one of around 50% might be about right though.
But again, it’s not the theory that Deveraux is advancing, it’s the quantification.
The basic idea dates from Ernst Seligman back in the 1890s. Harberger updated it in 1962.
The truly annoying thing is that Spud did get it once. But now that it’s convenient for him not to get it he doesn’t.
Absolutely everyone other than Ritchie agrees that some of the incidence of the corporation tax will be on labour in an open economy. Even the TJN for the Lord’s sake. Here’s what they themselves use as evidence:
The idea that the corporate tax could fall on workers stems partly from the idea that in an open economy, the corporate tax will scare away investment, thus hurting workers. But this does not hold up in the evidence, particularly in larger economies. See, for instance,
Distribution of Household Income and Federal Taxes, U.S. Congressional Budget Office, 2012, p16, which works on the basis that 75 percent of the burden of the corporate tax falls on capital.
Also see Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis, U.S. CBO, May 2012, Jennifer C. Gravelle, highlighting models that either find “capital bears the majority of the corporate tax burden” or that “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.”
Gravelle, Jane G. and Kent A. Smetters. 2006. “Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax.” Advances in Economic Analysis & Policy vol. 6:1.
Also see In search of corporate tax incidence, Kimberley A. Clausing, Tax Law Review, 2012 (“there is simply no clear and persuasive evidence of a link between corporate taxation and wages.”)
See also How the TPC distributes the corporate income tax, Urban Institute and Urban-Brookings Tax Policy Center, Sept 13, 2012, which finds that 80 percent of the burden falls on capital.
The U.S. Treasury uses a rate of 82 percent: see Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology, May 17, 2012. Higher corporate cash piles in recent years presumably will shift the burder still further away from workers.
See also Sharing the Burden: Empirical Evidence on Corporate Tax Incidence, Nadja Dwenger, Pia Rattenhuber, Viktor Steiner, Max Planck Institute for Tax Law and Public Finance, Working Paper 2011 – 14 October 2011, which finds empirically that labour bears 19-29 percent of the burden of the corporate income tax. In small countries and tax havens, tax rates will have more impact on wages, but even then — and this applies to large as well as small countries — these effects, such as they are, will disproportionately impact the skilled, highly remunerated professions such as accountancy and law firms, meaning that tax cuts will tend to increase inequality.
All of that being arguments over the split in incidence, not that there is a split in the first place.