Monday, January 07, 2008

Workers Pay the Burden of Higher Corporate Taxes

Democratic front-runner Obama wants to raise corporate taxes, and taxes on capital gains and dividends. John Edwards says he will stand up to the interests in Washington that run government for the "glorification of corporate profits," as he has been regularly condemning the top six oil companies for collecting over $477 billion in profits over the past six years and often criticizing Exxon Mobil for earning $40 billion last year, the largest annual corporate profit in history.

But who actually bears the burden of higher corporate taxes? The standard assumption is that shareholders absorb the impact of higher corporate taxes, and not workers. But a new Treasury research paper, "A Review of the Evidence on the Incidence of the Corporate Income Tax," questions that assumption:

From the paper's conclusion: The incidence of the corporate income tax is an important issue for designing tax policy. Who bears the corporate income tax can affect overall conclusions about the progressivity of the tax system. Policy analysts have often made assumptions about how to allocate the corporate income tax in measuring the distribution of tax burdens.

A common assumption, based on theoretical models of tax incidence, is that capital (i.e. shareholders) bears the burden of the corporate income tax. Recent empirical work using cross-country data on corporate taxes and wages suggests reconsidering this assumption; labor may actually bear a substantial burden from the corporate income tax.

Empirical evidence from three different studies cited in the paper includes:

1. It is estimated that 61% of any additional corporate tax is passed on in lower wages in the short run, and around 100% in the long run.

2. Using cross-country panel data from the Luxembourg Income Study, it is estimated that a 10% increase in the corporate tax rate decreases annual gross wages by 7% percent.

3. The results in this paper suggest that corporate tax rates affect wage levels across countries, and that higher corporate taxes lead to lower wages. A 1% increase in corporate tax rates is associated with nearly a 1% drop in wage rates.

Bottom Line: Corporations don't pay taxes, individuals pay taxes in their roles as shareholders, workers and consumers. Higher corporate taxes translate to lower dividends for shareholders, lower wages for workers and/or higher prices for consumers. According to the empirical evidence presented in this paper, it appears that a substantial burden of increases in corporate taxes fall on the workers employed by corporations. Higher corporate taxes = lower wages.

(HT: Ben Cunningham)


At 1/07/2008 12:20 PM, Anonymous Anonymous said...

Strange that these two should bite the hands that feed them. CalPERS, California State Teachers Retirement System; California State Controller; Illinois State Board of Investment; New York City Employees Retirement System; New York State Common Retirement Fund; and labor funds such as SEIU and AFSCME are all major owners of Exxon stock. That $40 b profit pays for their member's retirement. But then keeping this information "secret" [at least to the rank and file] gives them a boogyman and election support. Will they really tax Exxon [and others] more? Sure, then the "Government" can "give" it back as increased AFSCME workers and stuff for the people.

At 1/07/2008 12:27 PM, Anonymous Anonymous said...

Those pesky company profits.

If only all companies could be run like Delphi, Visteon, General Motors, Ford and Chrysler - then the rest of the country could enjoy the same good times we're having here in the Great Lakes State.

At 1/07/2008 1:17 PM, Anonymous Anonymous said...

There is a radio talk show guy on the air here in Cleveland who is a loudmouth and often says ignorant things, but he did have a point when he said:

"You can't get big business."

That going after big business is counterintuitive. That if you keep pushing taxes and regulations on businesses they will either pass the cost to the consumer or close up shop and everyone loses their jobs.

At 1/07/2008 5:09 PM, Anonymous Anonymous said...

Have you read Adam Smith? Businesses pay all taxes. Consider the income taxes I supposedly pay. They come out of my paycheck before I ever see them. Those taxes are no more mine than the CEO's pay is, which I don't ever see either. Saying that I pay the tax is nothing but an accounting gimmick. Furthermore, it would be far more efficient and cheaper for both companies and the government if this ruse were abnadoned and it was called a tax on employee wages paid by business. Sure my nominal pay would be less, but I never see that anyhow. My effective pay would be exactly the same as it is now, and I wouldn't have to bother with filing a tax return.
As for the claim that business taxes are ultimately paid for by employees through lower wages? Hell, businesses use every excuse they can to lower wages. But lowering my wages does not mean I pay the tax. Adam Smith saw it right. Since all the money working people earn come from businesses, businesses are ultimately the ones who pay the tax. It doesn't matter that the payment is cycled through the employee. Use your heads before you buy into this s&*t!

At 1/07/2008 6:36 PM, Anonymous Anonymous said...

There are these creatures on the planet that actually don't work as employees. We call these organisms independent business owners. There are millions of people who invest their own money, time and labour in small businesses often working from home and often without any employees save a supportive spouse.

Why is it assumed that all corporations are necessarily exploitive of workers by virtue of creating paid employment and paying workers on the basis of price their skills command in an open job market? If the wages are too low, how can any business hope to retain skilled workers and how does a high staff turnover rate which raises training, administrative and supervision costs while lowering productivity benefit a business?

A corporation is an ownership structure to limit business liability to business assets so that the business owner does not lose the family home if a lawsuit is filed against his/her company.
Corporations come in all sizes not just BIG.

At 1/08/2008 10:30 AM, Anonymous Anonymous said...

It's funny how the same people that complain about corporate profit and want higher taxes complain about outsourcing, which is at least partially caused by higher taxes.

I wish they would teach some basic economics and business theory in our schools. Most people don't even know what "corporate profit" means! This is more important than the garbage they spend so much time teaching (such as extensive classes on recycling and tree hugging).

At 1/08/2008 8:16 PM, Blogger Craig Howard said...

"Businesses pay all taxes."

Yes, of course, but you've misinterpreted Smith. I, as an employee, am part of that business. It doesn't pay my wages out of the goodness of its heart; it pays me for my contribution to its creation of wealth. And that my employer sends my taxes into Washington and Albany through withholding is a convenience to the government -- not an indication that my employer has earned them for me.

If you limit your argument to government workers, you'd be correct. I (and everyone else who works in wealth-creating businesses) do pay the taxes of government employees. If the average NY State bureaucrat, for example, makes $50K/yr, then it's true that his portion of taxes is simply deducted from what we send to the government and the balance forwared on to him.

At 1/09/2008 1:56 AM, Anonymous Anonymous said...

"Businesses pay all taxes"
No they are passed on to customers and down the food chain to the end users-- mostly the working class in direct proportion the the % of the GDP they represent.

really all businesses pass on there costs.

At 2/24/2008 5:33 PM, Blogger Crutch said...

Individuals pay taxes. Businesses only provide a convenient service for employees to make payment easier. Granted, Anonymous, you can change the perspective by saying your effective pay would be the same but it leaves out an important theme in economics - the money from an increase in taxes must come from somwhere, the consumers; the money from a decrease in taxes must go somewhere, shareholders. You have balanced the money earned from corporations to the government in taxes by saying employees don't pay. But if taxes increase employees will pay in the form of consumers. No matter how you look at it, it is the individuals who end up paying the taxes.

If the tax on gas were increased, would Exxon absorb this cost in its profits? The consumer or individual will pay this tax.

At 10/24/2008 10:41 PM, Anonymous Anonymous said...

The rest is absorbed in higher product prices.

Because workers create most of the wealth, workers must pay most of the taxes. Entities that do not produce wealth must by nature pass on taxes to entities that do produce wealth.

At 10/24/2008 10:43 PM, Anonymous Anonymous said...

Note that the tax workers pay through business taxes is always a flat tax.


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