You Cannot (Should Not) Tax Corporations

From the news: Google pays almost no taxes.

Fact: It doesn’t matter. Corporate taxes are levied on profits, which means that their effects are identical to rising production costs. This is why every sane economist will tell you that corporate taxes are ultimately paid by the customers and the employees. Furthermore, in a globalized world corporate taxes are next to impossible to enforce, for companies can simply “profit-shift”, i.e., do (legal) accounting tricks, to reduce their tax liability. No human being can determine the exact location of every dollar of profit.

It is much more efficient (and fair) to levy taxes on the employees (remember: the members of the executive board are also employees). This practice is known as “income taxation”. It has worked for several centuries, and it will work even in a globalized world, since labor is not nearly as mobile as capital. Not accepting this fact doesn’t make you socially responsible. The contrary is the case. You simply ignore unchangeable facts.


5 comments on “You Cannot (Should Not) Tax Corporations

  1. And the corporate profits are taxed AGAIN as dividends and capital gains.

    The tax on profits are only partially passed on to customers and workers, but your average leftist wouldn’t even understand that much.

    Corporations use public goods just like people, so in my opinion they should pay taxes. But the tax rate should be low and there should be no double-taxation.

    Since shareholders are the owners, you could eliminate the corporate income tax and tax dividends as ordinary income or tax the company only on distributed profits. It’s tough to say what would happen then. If you tax dividends, then there might be more dividend pressure or it could raise the cost of equity relative to debt.

    There will still be a negative impact on labor as long as the tax is realized by the firm as a variable cost of production.

    An alternative would be to have taxes on dividend payouts, but make it deductible for the company. This would put equity on an even basis with debt.

    • We don’t need to pay taxes because we use public goods. Governments could charge fees. Fees have the advantage that they give incentives to save on the consumption of public goods. Of course, for corporations fees aren’t different from taxes, they are both costs.

      You are right, there are ways to tax equity and debt equally. However, I still do not think that it is worth taxing corporations. Take this (real) example: In the year 2001, the US Federal Government received $151 billion from corporate taxes ($530 per US citizen), versus $1688 billion from individual income and social insurance taxes. And that is probably the most flattering comparison for corporate taxes, because the USA probably has the highest taxation of corporations worldwide. Still they can only extract 1/11th of individual taxes from corporations. At the same time, these taxes probably have large negative effects, like fostering the power of large companies (because of high market entrance costs for small companies), driving companies out of the country, and hampering job growth because firms react “more elastically” to costs that individual tax payers do.

      Nobody knows the exact figure of these costs, but they could easily be in the same range as the total of corporate tax receipts. So, why not go the easy way and tax where it generates the most revenue with the least economic problems?

      • You can’t charge a fee for national defense or the justice system. Corporations benefit from these public goods.

        I’m not rejecting your ideas out of hand. I’m just saying it’s a common mistake to believe that a different type of tax or a different payer is welfare superior, but most of these alternative proposals are welfare neutral.

        For example, in the US workers pay 6.2% of income for social security and their employers pay 6.2%. If the employer paid the entire 12.4% or if the worker paid 12.4%, all three schemes would have exactly the same economic incidence. Economic incidence is independent of statutory incidence.

        Right now debt has the advantage of a tax deduction which induces too much debt for American companies. But there is likely an equity tax (with deduction) which yields equivalent results.

        There’s some research, I think, that there exists an income tax scheme which is equivalent in economic impact to a VAT.

        With distortionary taxes, you’re often just shifting marbles around and not changing economic outcomes except for tax differences (which could be changed to eliminate the difference).

      • Your Social Security example is absolutely spot-on. It doesn’t matter what the law says because the economic incidence is the same in all variations. Although there are some differences, the distinction between corporate taxation and individual taxation is similar to the SS example.

        As far as I know, VAT reduces labor supply, and investment to some effect, just like income taxation does. The advantage of a VAT is that it can’t be avoided as easily as income taxation. Obviously, the “disadvantage” is that you can’t redistribute wealth with a VAT as easily as with an income tax.

        Practically all taxes are distortionary to some degree. The classic Econ101 example of a non-distortionary tax is the “lump-sum tax”, which, obviously, would be a very unpopular tax under a democratic regime.

  2. Per unit taxes are not distortionary in the presence of a negative externality, but the amount of the tax would have to be chosen with laser precision to eliminate the inefficiency. Exception, not the rule.

    Yes, there are some administrative advantages of a VAT. The problem with establishing a VAT in the US is that the federal government might also retain the income tax or states might establish or increase their income taxes.

    I don’t believe in taxing blood, sweat, or tears. We should not have an estate tax, no income/labor tax, and no tax on legal judgments which compensate injured parties or sales tax on replacement of stolen or destroyed goods.

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