WHO PAYS THE CORPORATE INCOME TAX

The corporate income tax provides a good example of the importance of tax incidence for tax policy. The corporate tax is popular among voters. After all corporations are not people. Voters are always eager to have their taxes reduced and have some impersonal corporation pick up the tap.

But before deciding that the corporate income tax is a good way for the government to raise revenue we should consider who bears the burden of the corporate tax. This is difficult question on which economists disagree but one thing is certain people pay all taxes. When the government levies a tax on a corporation the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people the owners customers or workers of the corporation.

Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why consider an example. Suppose that the U.S government decides to raise the tax on the income earned by car companies. At first this tax hurts the owners of the car companies who receive less profit. But over time these owners will respond to the tax. Because producing cars is less profitable they invest less in building new car factories. Instead they invest their wealth in other ways for example by buying larger houses or by building factories in other industries or other countries. With fewer car factories the supply of cars declines as does the demand for autoworkers. Thus a tax on corporations making cars causes the price of cars to raise and the wages of autoworkers to fall.

The corporation income tax shows how dangerous the flypaper theory of tax incidence can be. The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax the customers and workers of corporations are often not rich. If the true incidence of the corporate tax were more widely known this tax might be less popular among voters.

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