It might be called the ‘corporate’ tax, but research shows that workers pay it
White House spokesperson Jen Psaki drew a lot of criticism this week when she said that it would be “unfair and absurd” for companies to increase costs for consumers in response to the federal government taxing them more:
This is not, in fact, the craziest thing you may have heard on economics recently. Consider a business that is hit with higher corporate taxes. Will it raise prices to cover the extra expense? If it can, why doesn’t it do so? If it could get away with charging a higher price, it would probably already be doing so.
But someone has to pay this tax — and just because it is called the corporate income tax doesn’t mean that it will be corporations. The tax may be imposed on a corporation, but the incidence of the tax — who actually bears the burden — is not for the government to decide.
As I’ve written before:
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.
So Jen Psaki might be right, maybe prices won’t go up and consumers won’t be hit by the Biden administration’s proposed hike of the corporate income tax rate from 21 percent to 26.5 percent — it could be the workers who bear the burden instead.