Research finds consumers pay for corporate taxes through high retail prices

Proponents of high corporate taxes usually have one argument to throw around; raising taxes on corporations doe snot affect workers or consumers.

But is this true? Research does not seem to agree.

Economic theory differentiates between who pays the tax, and who the tax is levied upon. Who pays the tax — tax incidence — is usually not the person upon whom the tax is levied on. Market factors ultimately decide who bears the burden of the tax.

Now, if you assume that owners of corporations — shareholders — bear the full burden of the corporate tax, then high corporate taxes would not affect workers or consumers. However, that is not how things work in the market.

When businesses face high corporate taxes, they may raise prices or reduce the wages that they pay to employees. In this case, some if not all of the burden of the corporate tax may be transferred to consumers and employees, depending on how responsive market participants are.

A recently published NBER paper specifically provides evidence showing that raising the corporate tax raises retail prices. Moreover, these effects are magnified on low-priced items and products purchased mainly by the poor.

As the authors explain,

Our empirical analyses are motivated by a simple model of corporate tax incidence. We find an elasticity of retail price to the net of corporate tax rates (1 − τ ) of approximately 0.17. This means that a one percentage point increase in the corporate tax rate leads to a 0.17 percent increase in retail product prices.

The argument that corporate taxes do not affect consumers or workers is simply not true. As the evidence shows, consumers pay for corporate tax hikes through higher prices.