BOHANON & STYRING: Taxes are paid by people, not corporations

At election time, we always hear, “Corporations don’t pay their fair share of taxes.”

We agree. Corporations never pay their fair share. Why? Because no matter how high you raise corporate taxes, corporations never pay anything! You’ll never shake hands with any corporation, nor any other non-human entity, that ever paid a dime in taxes. Flesh-and-blood people pay all taxes.

This seems odd at first glance. A corporation gets taxed and writes a check to the tax man. Isn’t that paying taxes? No, because you have to look further to see who really bears the burden. It’s always real people, not artificial legal entities.

Here’s a simple example, Joe’s Bar & Grill. Joe is a sole proprietor. He and his family are the owners, bartender, cook, wait staff and janitor. Suppose Joe’s income tax rate doubles. Joe might try to raise prices to pass the tax along to his customers. In that case, his customers really pay the tax.

Suppose competition is such that Joe can’t jack up his beer and burger prices. Doesn’t this mean the business eats the extra taxes and “pays” them? No. In this example, it’s easy to see it’s Joe and his family who really pay the tax. They have less income from their business, which means they get a lower return on their investment and/or lower compensation for their labor.

Joe might write his tax check against the business account. But it’s someone else, some person—Joe’s customers or his family—who really bears the burden.

Imagine now it’s Joe’s Bar and Grill Megachain Inc. Ticker symbol JBGM is subject to corporate, not individual, taxes. JBGM writes the tax check. But it doesn’t “pay” the tax any more than Joe’s little family business did. Tax incidence is still either on some combination of the customers via higher prices, and/or employees with lower wages than otherwise, and/or investors through lower investment returns.

Ask any corporate-tax hiker just whom in this group he wants to screw over: consumers, workers or investors? The answer will always be, “I like workers and consumers. I want to nail those fat-cat investors.” Then point out that the majority of equity capital of American corporations is owned by IRAs, 401(k)s and pension funds—i.e. future average retirees. “You mean you want to tax the future retirement income of average Americans?”

Then have fun watching Mr. Nail-the-Corporations squirm.•

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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.