Research finds consumers pay for corporate taxes through high retail prices

Corporate taxes is one way that state and federal governments collect tax revenue. It is one of the most important factors businesses consider when deciding production location. In the United states, each state levies corporate taxes differently and some states do not levy corporate taxes.

Depending on how they are levied, corporate taxes have been found to influence location decisions of businesses. Corporate taxes may also affect the rate of business formation in an area. Not much focus is however given as to how corporate taxes affect consumers. But economic theory asserts consumers pay for some part of most taxes levied on businesses. Therefore drawing from the same idea, we should expect consumers to bear some burden of corporate taxes placed on businesses.

This is basically the idea that tax incidence does not always fall on whom a tax is imposed on. For instance, when governments mandate businesses pay minimum wage, businesses may either cut costs or raise prices in order to raise revenue. In the same way businesses may transfer part of their corporate taxes to consumers through higher prices.

A recent NBER paper has found significant impact of corporate taxes on retail prices. These effects are magnified on low priced items and products purchased mainly by the poor;

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.

This has of course serious implications on tax policy and how governments can effectively levy corporate taxes without reducing consumer welfare.  For states moving into reducing their corporate tax burden, one possible benefit might be an increase in consumer welfare.