Nick Shaxson ■ The other four fifths of the corporate tax “incidence” question
We’ve done two blogs in the past week on the fraught question of the ‘incidence’ of the corporate income tax: that is, the question of who ultimately bears the burden for paying the tax. Is it the shareholders of the corporation that gets taxed? Is it the workers? Is it customers? Who is it?
Now we offer a new guest blog by David Quentin, a UK tax barrister, who fills out the picture by taking a much broader-perspective view of the issues.
The other four fifths of the corporate tax “incidence” question
A guest blog by David Quentin. Adapted from his original post.
Companies are legal persons. It is of the very nature of corporate personhood that they act in their own names rather than as agents for their members, and they own their assets beneficially for themselves rather than as trustees for their members. This means that if a company has to make a payment (a payment of tax, for example) then prima facie it is the company itself which bears the economic burden of the payment.
When economists talk about which category of person the “incidence” of corporation tax falls on, however, it is always either shareholders or workers or some other category of person aside from the company itself. As a lawyer this makes no sense to me. Clearly the incidence of a tax doesn’t necessarily fall on the person whose legal obligation it is to pay it, but why should that mean that it must fall somewhere else?
When popular commentators address this question they usually say something like “the incidence can’t fall on the company because the company isn’t a real person; it is a legal fiction” but they never go on to explain why the fact of not being a human means that a legal person owning its own assets beneficially for itself can’t bear a tax burden. Of course it is true that the company making a payment of tax will consequently have less money available for other stuff (dividends; salaries; whatever), but that does not mean that it is necessary to hunt around for someone else who bears the economic burden. Every person, whether flesh and blood or a legal fiction, has less money available after a payment of tax. If companies can’t be analysed as bearing a tax burden for that reason, no-one can.
The real question being discussed here is therefore not “tax incidence” as such, but the wider question of the economic impact on humans of the (in-part, taxable) profitability of companies.
If companies can’t be taxed without humans bearing a cost, it must also be true that companies can’t generate profit without humans bearing a cost. Arguably, that cost is borne directly by workers who are paid less than their work is really worth, and also indirectly by, for example (i) those workers’ family members insofar as they work unremunerated in the home, (ii) the people in workless poverty whose very existence keeps wages low, and (iii) all of us to the extent we bear the cost of environmental externalities stemming from the activities creating those profits.
Some of those profits, generated at a human cost, are then taxed. This tax may or may not modify the already existing adverse impact of the profits, in part by delivering benefits, and in part by shifting a burden. That being the case, the question “upon whom does the ‘incidence’ of corporate tax fall?” is using economics jargon to perform a rhetorical sleight of hand, asking only a narrow portion of the true question in order to yield a misleading answer. It is a bit like driving a truck at a crowd of people and asking “who bears the burden if we beep the horn?”
So the other portion of the question that is really being asked (if it is to be carved up into a “tax incidence” question and a residual question) is “who bears the economic burden of corporate profits insofar as they arise untaxed?” Indeed given how low rates of corporate tax are these days, that portion of the question is fully four fifths of it.
Sadly, economics does not offer any sort of consensus on the question of where corporate profits come from, so it has nothing useful and determinate to say about this other four fifths of the (so-called) corporate tax “incidence” question. Which makes it surprising to me that respected economists are even to be seen asking it. One thing is quite clear, though; the economic burden of untaxed corporate profits is absolutely not borne by shareholders; on the contrary, shareholders are the people who stand to benefit from untaxed corporate profits. So if anyone tells you that corporate tax is regressive because its “incidence” falls on workers, they are talking a steaming load of old (ahem) nonsense, based on a rhetorical sleight of hand.
And that, if it does nothing else, goes to explain why the kind of people who complain that the incidence of corporate tax falls on workers are more likely to be from a right-wing think tank than a trade union.
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