Friday, April 2, 2021

Who Will Really Pay for the Proposed Corporate Income Tax Hike?

 From Dr. John Goodman writing at Forbes:   

If there is one thing that virtually all economists are united about, it is this: corporations don’t pay the corporate income tax.  

Why is that? A corporation is not a person. It is a relationship ­– a relationship between workers, managers, stockholders, consumers and others. You can tax relationships. But relationships don’t pay taxes. 

The sales tax, for example, taxes a relationship between buyer and seller. But sales don’t pay taxes. People do. The burden of the sales tax must fall on the buyer, the seller or both. In competitive markets, economists think the full burden falls on the buyer. This conclusion makes sense to most people because they see the tax nominally added to the prices of the goods they buy at the cash register.

But what we see with our own eyes isn’t necessarily good economics. Take the payroll tax. This is a tax on wages. But wages don’t pay taxes. The burden must fall on the buyer (the employer) or the seller (the worker) or both. In practice (and by law), half the tax is deducted from the worker’s wages and the employer sends a check for the whole amount to the government. So, it looks like the worker is paying half and the employer is paying half.

However, careful studies by economists over many years show this is not the case. The burden of the tax is not determined by who writes the check to the government. It is determined by how the market adjusts to the tax. In this case the evidence is quite convincing: the full burden falls on the workers. That means that for every dollar of payroll tax the government collects, workers’ pay will be a dollar lower than it otherwise would be.

Full post here.