Tuesday, September 21, 2021
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Who pays corporate taxes?

Occasionally it falls to sensible people to explore common wisdom to discover how wise it is. In this case, the common wisdom on the question of corporate taxes is split. Democrats, by which I mean their Marxist theoreticians and leaders, say that corporate taxes are never enough and that these taxes are paid by robber barons out of their hoards of gold coins. Republicans, on the other hand, say that corporations pass their taxes through to the people who buy their products, meaning that taxes are paid by consumers. Which is correct, or is neither correct? Let’s find out.

A corporation is simply a legal fiction that allows a business or other concern to be treated as if it were a person. Since it is a fictional person, the taxman treats it like a real person when it comes time to pay taxes, and charges it a tax rate similar to the rate charged real people.

Is this a good idea?

Corporations are employers, buyers of raw goods, producers of finished goods, convenient holding companies for capital goods, and when times are good also sources of returns for investors. If the cost of raw goods plus the cost of production and sales is less than the sales price then the corporation makes a gross profit. Out of this gross profit come the wages of the workers and managers, further capital investments to improve the productivity of workers, and returns for investors. What happens when government reaches into a corporation and takes out a tax? Specifically, who actually pays corporate taxes by having less money in his pocket at the end of the month?

When taxes increase to a business several things happen.

  • First, it cuts wages by reducing worker hours, giving pay cuts, or denying pay raises. This is almost always the first recourse, because variable costs like labor are the easiest expenses for any business concern to cut. The Washington Post reports that 70-92% of corporate taxes are paid by reducing employees’ pay.
  • Second, the corporation hires tax accountants, lawyers, consultants, and even lobbyists to cut its tax load.
  • Third, the corporation reduces maintenance and capital investment, which will slow down the corporation’s future growth and may cause it to fail at some future time if its competitors do business from places where their taxes are lower and they can increase their productivity faster.
  • Fourth, it tries to charge customers more.
  • Fifth, it tries to replace its raw materials with cheaper alternatives.
  • Sixth, it may engage in cost cutting measures on peripheral activities to do things like save energy, replace computers over a longer cycle, or reduce paperwork costs. These typically only produce minor savings as competent businesses are already cheap about peripheral activities.
  • Seventh, it may lower returns to investors, making its stock less valuable

Are any of these results of corporate taxes good things, or do they all damage workers, investors, and other businesses? Since corporate taxes mostly work by taking money out of the pockets of employees, with less impact on highly valued employees and greater impact on employees as their value to the company decreases, aren’t corporate taxes simply an extremely regressive tax that has disparate impact on entry level, unskilled, and disabled workers?

Let’s talk about this in a way that everyone can understand. The average employed married American worker makes about $50K and pays taxes at the 15% marginal rate. If he or she works for a for-profit corporation, then the impact of the corporate tax is to reduce his or her gross salary by 70% of 34%, or 23.8% (assuming a fairly successful small business). I’m choosing the lowest impacts I can find in the tax tables and I’m playing a little loose with adding and subtracting percentages, but the result is that I’m understating what happens, not overstating it. The average might be higher. Our hypothetical worker would make 23.8% more in wages if there weren’t any corporate tax. It also at least doubles the federal tax that the average worker pays. For a worker making $50,000 that is a $12,000 raise that won’t happen because the government stole it away in the dark of night! Does the average worker making $50K receive more value from the government than he or she would get from that $12,000 that was cunningly taken out of his pocket? Or is it simply a sneaky way for the government to siphon money out of the economy with a “corporate tax” without workers realizing they are the ones whose pockets are being picked?

Who pays corporate taxes? The answer is: if you work for a corporation, you do.

This post originally appeared without the introduction on the beaglescout blog

9 COMMENTS

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9 COMMENTS

  1. How about a corporation consisting of one or two people? I really don’t know much about small businesses, but don’t they have to pay, if they give themselves a salary, both the employer’s and the employee’s portion of FICA taxes?

    • Yes, that would count too. Add 15% to the marginal rate and recompute. In fact, that right there would probably make it a clear win. Nobody now contributing to SS/Medicare expects to get back their pay-in. They’d be better off getting low cost private insurance and buying gold and silver coins. I know I’d much rather get the extra income from the corporation and invest it myself.

      • I think I missed one thing. In your question you asked about small corporations. S-corps are taxed on the individual taxpayer’s return. So are the draws from partnerships. C-corps are the kind of corporations I’m talking about. They have to fill out their own corporate tax returns, pay salaries, and so on. A very small C-corporation might be at a lower marginal tax rate than the 34% I assumed. But most corporations at this level are S-corporations and simply have to deal with the individual tax code. The effect on employment in S-corps would be the same. Companies can’t unilaterally raise prices because their customers won’t pay more. They can’t cut many other costs. But they can cut payrolls, usually starting with the least valuable and newest employees.

  1. How about a corporation consisting of one or two people? I really don’t know much about small businesses, but don’t they have to pay, if they give themselves a salary, both the employer’s and the employee’s portion of FICA taxes?

    • Yes, that would count too. Add 15% to the marginal rate and recompute. In fact, that right there would probably make it a clear win. Nobody now contributing to SS/Medicare expects to get back their pay-in. They’d be better off getting low cost private insurance and buying gold and silver coins. I know I’d much rather get the extra income from the corporation and invest it myself.

      • I think I missed one thing. In your question you asked about small corporations. S-corps are taxed on the individual taxpayer’s return. So are the draws from partnerships. C-corps are the kind of corporations I’m talking about. They have to fill out their own corporate tax returns, pay salaries, and so on. A very small C-corporation might be at a lower marginal tax rate than the 34% I assumed. But most corporations at this level are S-corporations and simply have to deal with the individual tax code. The effect on employment in S-corps would be the same. Companies can’t unilaterally raise prices because their customers won’t pay more. They can’t cut many other costs. But they can cut payrolls, usually starting with the least valuable and newest employees.

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