The Senior Lecturer still doesn’t understand tax incidence

The FT issued an email last night saying:

Steven Mnuchin warns of market fall without tax cuts.

The US Treasury secretary warned Congress that US stock markets will shed a “significant amount” of their recent gains if lawmakers do not pass tax reform.

On the eve of a critical Senate vote aimed at pushing tax-cutting plans forward, Mr Mnuchin told Politico in a podcast that there was “no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform”. US equities would “go up higher” if the reform plans, which include a reduction in the corporate tax rate, were passed.

This is interesting for three reasons. First, it says quite explicitly that the proposed tax reforms are meant to cut the tax rates of big business. Second, it quite clearly states that the corporate tax rate changes share prices, in this case by driving them sharply upward. And third, as a result it states quite clearly that the US Treasury thinks the incidence of corporation tax is on shareholders, who are already capitalising the value of the gains they are to be given.

But let’s stop debate on who benefits: Mnuchin has stated what we all already knew, which is that this is for the undisputed benefit of the owners of capital on whom almost all the incidence of corporation tax indisputably falls. That debate is, I think, now closed.

At which point we’ve got to conclude that idiot is still idiot. Because everyone does agrees that in the first stage the incidence of the corporate ta is upon the holders of capital. But that’s the point, that’s the start of our analysis.

What happens when you tax something? You get less of it. So what happens when we tax investment, or saving? We get less of it. And as even Spudda will agree it is indeed investment over time which makes us all richer over time. So, the more we tax investment, the less there will be, the less rich we all are over time.

That shareholders bear the incidence of the corporate income tax in the first iteration is well known and is so well known that it’s the start of our analysis, not the end as the Senior Lecturer at Islington Technical College seems to think.

7 thoughts on “The Senior Lecturer still doesn’t understand tax incidence”

  1. It is not invariably the case that corporate taxation hits the shareholder in the first iteration. I remember that my former employer used in the pre-Thatcher era to invest in private water companies whose equity shares had fixed dividends and their regulator allowed/required them to set their charges so as to provide enough after-tax income to pay the fixed dividends on their preference and equity shares – so an increase in tax rates immediately resulted in an increase in charges by the Water Companies and the incidence of taxation was on their customers.

  2. Wasn’t Spud arguing a while back that corporations existed in their own right as persons and therefore any taxes on the corporation was not a tax on the owners?

  3. Most people don’t seem to understand where taxes have incidence. The boss of a major UK supermarket believes that leaving the EU customs union means that UK prices will go up. I keep trying to explain to people that leaving the EU and defaulting to WTO rules forces tariffs *DOWN* not up, that, for example, we would be forced to *ELIMINATE* the current 52% tariff on non-EU dairy products.

    “Yes, but if we don’t get a deal, we’ll have tariffs on imports”.
    Only if *WE* are incomprehensively stupid enough for *US* to *CHOSE* to to artificially make imports more expensive.

    “Yes, but if we don’t get a deal, the EU will put tarrifs on their exports”
    Anf who pays *export* tarrifs? EXPORTERs. Are the EU so comprehensively stupid that they are willing to shoot their own manufacturers in the face?

    “Yes, yes, yes, ok, but if we don’t get a deal, the EU will put import tariffs on goods they buy from us.”
    Sigh! Haven’t you been listening? Who pays import tarrifs? IMPORTERs. Are the EU so monumentally stupid that in lei of shooting their own manufacturers in the face, they’ll instead shoot their own consumers in the face?

    “But… but…. but…. We neeeeeed a deaaaallll!!!!!”

  4. JGH, I note only that there is more than enough monumental and comprehensive stupidity around, on both sides of the channel, to make your supermarket boss’s prediction actually come true.

  5. The EU customs union already shoots consumers in the face re non EU goods, Can’t see it being a problem in the minds of the hierarchy to shoot their own consumers over UK imports as well. In their minds the only problem is that (presumably – I haven’t done the calcs) the tariffs raised won’t fill the hole in the EU budget as a result of UK leaving.

  6. That’s the other argument I come across. “The UK government will need to impose/keep/increase import tariffs to fill the hole from leaving the EU”. But the government doesn’t get the tariff income, that goes to the EU coffers, so the UK government isn’t losing anything by losing the EU import tariffs.

  7. @jgh:

    I was talking about the EU negotiating team thinking that they can use tariffs on UK goods to offset loss of contributions from UK.

    As you say UK treasury does not lose by having lower tariffs on non-EU goods post Brexit.

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