Tuesday, February 17, 2009

I don’t want to pay it; you pay it

Spotty, who pays corporate taxes, anyway?

Why do you ask, grasshopper?

King Banaian says that consumers and labor — and maybe capital, a little — really pay corporate taxes, not the corporation on whom they are levied:

. . . The Tax Incidence Study done every two years here in Minnesota shows that of the $780 million collected in the corporate franchise tax, much is shifted to others. The report states that, while the taxes are legally paid by businesses, they are "...partially shifted to consumers (in higher prices) or in some cases to labor (in lower wages). Only a portion of business taxes are borne by capital owners as a lower rate of return on their investment." (p. 32)

To see this, take a look at the incidence report's Table A-1 at page 77. For a $120 million in additional tax on capital, only $61 million is borne by Minnesota businesses. Minnesota labor receives wages $3.8 million lower because of the tax. Most of the tax is borne by consumers because businesses raise prices to shift the burden of the tax onto purchasers of their products. Turning that into a sales tax does not mean a dollar transfers from consumer to business, as the corporate tax was mostly being transferred to consumers anyway. Consulting Table A-2 we find that $.42 of each dollar of corporate tax was transferred to Minnesota consumers, and another eight cents to labor.

So your conclusion is, grasshopper?

Well, the professor says why have corporate taxes, if somebody else pays ‘em anyway? Maybe he has a point.

He has a point, grasshopper, but as is often the case with our favorite Homo economicus, it’s largely irrelevant. And here’s why:

Businesses are consumers of public services, just as well as the, well, public. Transportation, banking, utilities, education, police and fire protection, etc. are all services that businesses use or are benefitted by, just like everyone else. And the services are either directly provided by, or facilitated by government. Why shouldn’t they pay something for it? Who do they think they are, really?

But Spotty, we could get a little more economic growth if we cut business taxes!

So? Businesses might grow faster if we encouraged them to become even more predatory than some of them already are, too. We could build nuclear power plants — and build ‘em fast — if we could just get over than darn concern about turning whole regions of the country into radioactive wastelands. And if we quit worrying about all those kids with asthma, we could build that Big Stone II plant in a jiffy.

In fact, business taxes just make businesses account for some external costs; it “helps” them pay their way. The professor says that the costs are “shifted forward”; Spot says they are just included in the price of the product or service offered. So the consumer gets to decide whether that product or service, including the true cost of producing it, is worth it.

Golly, Spot, that sounds like a true free market argument!

It is, grasshopper.

We’ll talk about his some more in coming days.

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