In the midst of an election year, politicians are resorting to their tired arguments about making “corporations pay their fair share” and raising corporate taxes. The irony is that no corporation actually pays this tax – it is secretly passed on to employees, customers and shareholders.
But you would never guess that from listening to politicians debating the level of corporation tax. The whole discussion is eerily like a shell game, where the audience tries to find the ball under one of three cups, but it is not under any of them. The fraud relies on sleight of hand that takes the ball out of play, just as the debate over corporation tax relies on rhetorical sleight of hand.
Companies pay taxes only nominally. Of course, an employee of the company writes a check to the state, and the money is debited from the company’s account. But taxes are just another cost of doing business, and such costs are passed on to people. Although a company is a person de jure, it is not a person de facto.
Taxes, like all costs of doing business, are borne by three groups of the population.
First, there are employees. Operating costs reduce profitability and the profit per worker that must justify a person’s wages. In other words, if a worker is paid $15 an hour but only contributes $10 an hour to the value of the company, that worker will soon be unemployed.
Corporate taxes do not affect the productivity of workers, but they reduce the share of that productivity that goes to the company. From the company’s perspective, the worker therefore does not contribute as much to the company’s bottom line, since part of the increase is deducted by the government.
The increase in corporate taxes leads to slower wage growth and lower hiring rates.
But customers also pay part of the tax in the form of higher prices. An increase in corporate tax has the same effect on the company as an increase in the costs of all input factors, be it the costs of raw materials, labor, utilities, rent or interest.
When the cost of doing business increases, those price increases are passed on to customers in the form of higher prices. If an automaker has to pay more for steel and aluminum, it will ultimately raise the price of its vehicles. Even though the company technically paid for the tax increase, the burden was once again borne by someone else.
And finally, there are shareholders. When taxes on corporations rise, those companies have less after-tax income, so investors get a lower return. This effect is not limited to Wall Street and large investment houses—virtually every American saving for retirement has some type of investment vehicle based on after-tax corporate income.
The portion of the corporate tax paid by investors hits workers with retirement plans, nurses and teachers as much as professional investors. Every time the corporate tax is increased, these people’s retirement accounts lose momentum. Instead of their money working for them, they have to work harder for their money.
The lack of transparency in corporate taxation also creates a number of economic inefficiencies that result in a net deadweight loss for the economy. In other words, the government could replace this tax with a more efficient direct taxation and do less damage for the same amount of revenue.
If the corporate tax is so inefficient, why do politicians support it? Precisely because of its lack of transparency and the ability to scapegoat “bad” companies. A receipt usually shows how much sales tax you paid, but you never see your share of the corporate tax bill.
Americans would do well to realize that they are being cheated in this shell game and that they will have to pay the price for it.
