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Who pays?

That is to ask, who actually foots the bill for business taxes? It is much easier for a politician to raise taxes on businesses, which do not vote and are constantly portrayed as the villains by our virulently ignorant press, than on individuals. But we learn, from todays (subscription-only) Wall Street Journal Political Diary, that it is not so simple::

A new study by American Enterprise Institute scholars Kevin Hassett and Aparna Mathur shows that the corporate income tax is for the most part paid by workers in the form of lower wages. They found manufacturing wages were negatively associated with high corporate tax rates in a study of 72 nations.

Taxes have to come from somewhere. Businesses will pass costs on to those with the least bargaining power. Businesses have to choose between holding down wages, charging customers more (hard to do, in a competitive market), paying capital less (very hard to do, in the brutally competitive capital markets), and cutting capital re-investment (not smart if you want to be in business in three years). In the absence of an extremely tight labor market, keeping wages down is the path of least resistance.

13 comments to Who pays?

  • pete

    A path of least resistance which is not taken by the biggest employer in the UK, the government. How do we explain the generosity of this employer? I recall it raised firemens wages when there were 40 applicants for each vacancy and gave performance related pay to 90% of teachers.

  • Lusiphur

    Yet we dont see boardroom reward packages being squeezed.

  • RAB

    The Taxpayer does!

  • guy herbert

    Partly, Lusipher, because they are much less expensive for firms. It is generally considerably cheaper to give an extra pound of post-tax income to the chief executive than to the lowest paid employee, let alone than to give that extra pound to all line workers. A lot of that odd incentive is down to government, some of it to the complexities managing workforce relations, and some of it to unavoidable administration issues.

  • Nick M

    I’m sure the scholars in question are very good but this strikes me as a statement of the bleeding oblvious. Ditto for employer NI contributions and all other taxes on enterprise.

  • A path of least resistance which is not taken by the biggest employer in the UK, the government.

    Because the government is not a business and does not have to worry about competitive pressures in either the capital markets or the markets for its services.

    It is a monopoly that can raises “prices” (fees and taxes) and cut quality without any loss of market share.

  • Also, pete, because the government doesn’t pay taxes.

    So you are asking why the government doesn’t pass on a cost it doesn’t incur.

  • Ryan

    I know this is off subject!

    What do you think of a rent tax? Eliminate all income and business tax. Instead replace it with a rent on foreign business to sell in a given market. The rent tax would be like renting space in a mall.

    I believe it would create positive economic environment. People would have more money to spend and government would strive for a positive business environment to increase income.

  • Paul Marks

    This “rent tax” would simply be a tax on imports – it is not “rent” it is a tariff (which is passed as higher prices to customers – as “business taxes” are).

    A nice 1930’s trade war (as other nations would impose tariffs against American prodocts) – that is not exactly what the world needs.

    Unless, of course, you mean a special tax (again nothing to do with “rent”) on business enterprises that are in the United States but which are owned overseas (for example a Honda plant in some Southern State).

    Why not go the whole way and say that a company not based in (say) Alabama can not have a factory in Alabama – or (to go further) that a company not based in (say) Auburn Alabama can not have a factory in Auburn Alabama.

    Where do these ideas come from?

    We need people like Bastiat and Henry Hazlitt to combat them.

  • Kim du Toit

    Corporate taxes are paid by customers (higher prices for the products) AND by lower wages for employees.

    Any compensation given to senior executives pales by comparison to government theft.

  • Ryan

    “Where do these ideas come from?”

    Hmmm? I guess the ideas come from a desire to eliminate taxes. I’m not fond of the income tax to fund services of the government. What is the best tax? No tax.

  • Ryan

    In order for the government to charge the “rent” tax, the business environment would have to be good. Consumption would be high and the regulations would be low. Once the tax is paid the business would have open access to sell as they please.

    But I guess it would be used to manipulate the economy. Oh well, thoght I would give it a shot. My desire to create a Capitalist anarchy would not be granted by the people.