What good are business/corporate taxes, since they merely pass the taxes on to the consumer?
This may come as a shock to some people, but Business’s DONT pay taxes! People pay taxes! When a business is taxed, all they do is pass that cost onto its customers.
Not necessarily. Businesses don’t operate on a dollar in-dollar out basis; instead many of them are able to realize a profit. This keeps the consumer from being passed all the corporate’s tax burden.
Furthermore, I don’t think anyone denies that consumers do wind up bearing a portion of burden with higher costs for goods, but it’s not as much as if you simply taxed people directly. Taxing businesses is a way of raising the same amount of revenue without overburdening middle class and lower income tax payers.
There are some other complexities that the more economically oriented may be more well suited to address, but hopefully this helps.
I personally think you’re right about saying in the end it’s the customer who pays those taxes. And I think this is exactly the good thing about them (as well as any kind of indirect taxation):
The richer someone is, the more items he can buy, the higher is his share in paying the company’s taxes. Seems fair to me.
(shrug) One very big advantage to taxing consumers indirectly by taxing businesses instead is that those consumers are more likely to vote you back into office in the next election if you do.
Not to mention that by taxing businesses, the government can encourage constructive business practices by offering tax incentives.
Depending on how elestic your market is, you can’t really pass 100% of your taxes on to the consumer. What that means is (in an elastic market) if my company raises prices by %30 (typical corporate tax rate), I may loose %30 or more of my total revenue.
You may also be surprised to know that you may be getting taxed multiple times. Most companies don’t convert raw materials into final products. Companies buy parts from other companies who buy parts from others and so on. Each company pays their own taxes, passing on a share to the consumers, who then pass those onto their consumers, and so on. Its all very complicated.
You are right to say that people pay taxes, not businesses Barking Spider. Taxes on businesses are paid by a combination of customers, workers, owners of capital, owners of land and other resources in that industry and those groups of people in related industries. The incidence depends as msmith537 said on various elasticities (most of which we don’t know).
The incidence of corporate taxes is a highly controversial area in economics. But a rough precis of the literature goes as follows: Providing the Modigliani-Miller theorem does NOT hold* corporate taxes matter. They perform three functions (not always well):[ul][li]They act as a withholding tax on dividends (in a similar way to payroll deductions for personal income taxes)[]They act as an accrual tax on (otherwise grotesquely undertaxed) capital gains (since share values reflect the expected value of the discounted stream of after tax company profits)[]They enable the taxation of international capital flows in what amounts to a revenue sharing agreement between various treasuries under the international tax treaties.[/ul][/li]
*M-M: “corporate financing doesn’t matter”. If M-M holds, company taxes act as a once-off, non-distorting capital levy (as long as there is appropriate treatment of new share issues). There need to be perfect capital markets for M-M to hold. No one thinks this is so, but some argue that they are sufficiently good that M-M nearly holds.
You have made an empirical claim without offering any evidence. I am just saying this to remind us all that this debate should not be, at bottom, an ideological one.
Barking Spider is correct that ultimately individuals pay taxes. However, there is no reason to believe that the entire burden of a corporate profit tax is shouldered by the consumer. Shareholders and employees may share part of the burden.
Now I backpedal. Working out who pays the corporate income tax is difficult and I am aware of new wholly persuasive estimates. Allow a thought experiment. If the corporate tax is raised, shareholders would take the first hit as after-tax profits are reduced across the board.
However, at this point investment in noncorporate activities will become more profitable than investment in corporate activities; and resources will shift accordingly.
If savers decide to save less because the rate of return on their investment has declined (this, BTW, is not a trivial assumption), then investment must drop. Lower capital expenditures leads to lower labor productivity, which leads to lower wages. So workers might be burdened. This effect is offset, btw, to the extent that foreign savings flows into our little economy.
Measuring all of the above is difficult.
…
Some claim that corporate taxes should be lower so that “double taxation of dividends” can be offset. (Dividends are taxed once at the corporate level and a second time at the individual level. Interest payments, in contrast, are counted as a business expense at the corporate level.)
I am sympathetic. But I would oppose abolishing the corporate income tax, because that would allow certain wealthy investors to construct dubious tax shelters which postpone realization of their income indefinitely.
(And, BTW, I would match a decrease in the corporate tax with an increase in income taxes paid by high income individuals. Or perhaps I would substitute in a tax on pollution emissions (a “bad”) for a tax on capital (a “good”).)
Arg. I am aware of no wholly persuasive estimates of which income groups pay the corporate income tax in practice.
If we assume corporate taxes are at least mostly paid by the consumer, then this is sort of like a consumption tax or VAT, is it not? Hence would it not be the case that if the far left got its mindless way, and income taxes were set to zero and the entire budget rested on corporate taxes, we would have as regressive a tax structure as a flat tax would make?
It is invalid to assume that a tax on profits will fall mostly on consumers. Most of it may fall on shareholders. (Or not, as I discussed above.)
Shareholders and employees are also consumers. Taxing corporation “A” (rather than corporation “B”) may not result in all of those taxes being paid solely by consumers of corporation “A”'s products, but it does result in all of those taxes being paid (eventually) by consumers.
The point being that taxing corporations rather than consumers isn’t saving consumers any money. It just makes us feel better <g>.
WillGolf,
Well, sure, everybody is a consumer of something but that is sort of beside the point. One can still influence how the tax burden is distributed by taxing in different ways.
This makes some sense, however it only screws the businesses that can’t afford to donate big bucks to congress. That means small businesses generally, who are the ones that provide the majority of jobs. It still benefits the big guy and screws the little guy. As an ex-small businessman I’d prefer a Value Added Tax, since the big companies have larger overhead.