OPINION:
In the throes of an election year, politicians are back to their hackneyed talking points about “corporations paying their fair share” and raising the corporate income tax. The irony is that no corporation really pays this tax — it secretly falls on employees, customers and shareholders.
But you’d never know that listening to politicians debate what the corporate tax rate should be. The entire discussion is eerily like a shell game where onlookers try to find the ball under one of three cups, but it’s not under any of them. The scam relies on sleight of hand removing the ball from play, as the corporate tax rate discussion relies on rhetorical sleight of hand.
Corporations pay taxes only in a nominal sense. Sure, a clerk at the business writes a check to the government, and the money comes out of the business’s account. But taxes are just another cost of doing business, and such costs are passed on to people. Although a corporation is a person de jure, it is not a person de facto.
Taxes, like any cost of doing business, are borne by three groups of people.
First, there are the employees. Operating expenses reduce profitability and the profit per worker, the latter of which must justify a person’s wage. In other words, if a worker is paid $15 an hour but adds only $10 an hour in value to the company, that worker will soon be unemployed.
Corporate taxes don’t affect worker productivity, but they do reduce how much of that productivity accrues to the corporation’s benefit. In the eyes of the business, therefore, the employee doesn’t add as much to the bottom line because some of the increase is being taken away by government.
The result of raising the corporate income tax is slower wage growth and hiring.
But customers also pay some of the tax in the form of higher prices. Increasing the corporate income tax has the same effect as increasing the cost of any input for the business, whether it’s the cost of raw materials, labor, utilities, rent or interest.
As the cost of doing business rises, those price increases begin being passed on to customers in the form of higher prices. If an automotive manufacturer must pay more for steel and aluminum, it will eventually raise the price of its vehicles. Once again, even though the corporation technically paid the tax increase, the burden was taken up by someone else.
Last, there are shareholders. As taxes on corporations rise, those businesses have less after-tax income, so investors receive a lower rate of return. This effect is not isolated to Wall Street and large investment houses — virtually every American saving for retirement has some kind of investment vehicle that relies on corporate after-tax income.
The portion of the corporate income tax that is paid by investors falls on blue-collar workers with pension plans, nurses and teachers just as much as it falls on professional investors. Every time the corporate income tax is raised, these people’s retirement accounts lose steam. Instead of their money working for them, they have to work harder for their money.
The lack of transparency with the corporate income tax also introduces a bevy of economic inefficiencies, which produces a deadweight loss on the economy. In other words, the government could replace this tax with more efficient direct taxation and cause less harm while collecting the same amount of revenue.
If corporate income taxes are so inefficient, why do politicians support them? Precisely because of their opacity and the ability to scapegoat “evil” corporations. It’s usually clear on a receipt how much you paid in sales taxes, but you never get to see your share of the corporate income tax bill.
Americans would do well to realize they’re being scammed by this shell game and footing the bill too.
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E.J. Antoni is a public finance economist and the Richard F. Aster fellow at The Heritage Foundation, and a senior fellow at Unleash Prosperity.
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