You may recall that I am generally opposed to the corporate income tax, frequently on the grounds that it is an “inefficient tax”. This article in the Economist does a pretty good job of explaining what that means. Here are some selections from the piece:
Other things being equal, a tax on corporate profits should hit shareholders—a group wealthier than the population as a whole—by shrinking the money available for dividend payments or reducing share values. But other things are never equal. Firms invariably respond to new taxes in order to minimise their costs. Depending on precisely how they seek to escape the tax, some of its burden may be passed on to others.
[…]
Increasing corporate tax in one country might then encourage owners of capital to move activity abroad, diminishing the amount of capital per worker at home, and potentially reducing workers’ productivity and pay. Indeed, research by Laurence Kotlikoff of Boston University and Lawrence Summers of Harvard University showed that in very small, very open economies the burden of a rise in corporate-income tax could fall almost entirely on labour.
The size of an economy and its openness to capital flows are just two of the five factors that most influence an economic model’s conclusions regarding the incidence of corporate-tax changes, argued Jennifer Gravelle Stratton, then of the Congressional Budget Office, in a paper published in 2013. (Size matters because changes in the capital stock of larger economies have a greater influence on the worldwide return on capital.) Another factor is how seamlessly production may be moved abroad in response to tax changes. Similarly, the ease with which labour may be substituted for capital determines how badly workers’ economic prospects are affected when capital flees the country (or threatens to). Last, who pays most depends critically on how capital-intensive the corporate sector is: the greater the level of capital per worker, the more each worker suffers if a corporate-tax rise affects where firms choose to deploy their capital.
What’s worse to whatever extent the cost of the tax is passed along to workers, it’s regressive, i.e. it falls hardest on the workers compensated the least. What makes that fair?
What is unclear to me is if it is always passed on to workers because that is intrinsic to the tax or if it is because the corporation makes sure it works that way so it doesnt affect shareholders. End result is the same I guess.
Steve
They do it because that’s the way their incentives point and because they can. How is that different from being “intrinsic to the tax”?