Inflation: What did cause it?
Yesterday I looked at popular explanations for America’s current inflationary woes and explained why they weren’t, in fact, its causes. So what did cause it? As I wrote last October,…
One of the great myths of public policy is that politicians decide who pays a tax. They might call it something like the ‘Medical Provider Tax‘ in the expectation that medical providers will pay it, but whether or not they do or pass it on to medical consumers instead is outside of the politician’s control. Likewise, just because it is called the ‘corporate tax’ does not mean that corporations actually pay it.
I wrote this recently about the proposed hike in Minnesota’s gas tax. The central point is ‘tax incidence‘, how the burden of a tax gets divided up between buyers and sellers. Politicians might hike taxes on cigarettes and healthcare and say that ‘big tobacco’ or medical providers will pay them. But if demand for these products and services is ‘price inelastic‘, ie, when the price goes up demand doesn’t fall that much, then the sellers can pass most or all of the burden of the tax onto the consumer. The same, incidentally, goes for tariffs, which are just taxes. An American politician might say that China will pay them, but that doesn’t make it so.
Corporations don’t actually pay corporate tax
Amid the recent clamor in Saint Paul for tax hikes came the call to raise taxes on corporations. Somehow, it was argued, this was part of making ‘the rich’ pay their ‘fair share’.
Indeed, there there is no income earning thing called a ‘corporation’ that exists and earns income above and beyond the people who constitute that corporation, the stockholder-owners. Leave aside, for a moment, the fact that more Americans than ever own stocks thanks to 401ks and other retirement accounts, perhaps these stockholder-owners are the rich we want to tax harder?
But remember, just because a politicians impose a tax on this or that person or entity, it does not follow that they will necessarily bear the burden of the tax. If demand for the corporation’s product or service is ‘price inelastic’, the stockholder-owners can pass most or all of the burden of the tax onto consumers in the form of higher prices. If labor is plentiful, say in times of high unemployment, workers can be replaced with machines, or the corporation can fairly easily move to another tax jurisdiction, the burden of the tax might be passed on to workers in the form of lower wages. Only where demand for the corporation’s output is price elastic, labor and capital substitutes are scarce, and the corporation cannot move, will the main burden of the corporate tax fall on the stockholder-owners.
There is a decent sized body of empirical literature which attempts to quantify exactly who bears the burden of corporate taxes. These studies suggest that labor bears between 50% and 100% of the burden of the corporate income tax, with 70% or higher the most likely outcome.
What’s in a name? Intentions, when it comes to taxes. The actual outcome might be very different indeed.
John Phelan is an economist at the Center of the American Experiment.