Who Pays Corporate Taxes?

At bottom 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 with his or her reduced take-home pay?

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. That means the average worker would make 23.8% more money 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 who are being robbed?

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

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The Snarky Economist

You have to read Thomas E. Woods’ deliciously snarky response to an economic illiteratista who dubs himself “Che.” Che’s commentary is in bold, and his fisking by Woods follows.

If free market principles were allowed to rule, like Schiff wants, what that means is everything is based on maximizing profit.

At this point we are all supposed to gasp at what a terrible prospect this would be. After all, the track coach and Michael Moore have told us about the wickedness of “profits,” so what more is there to say, really?

But as we’ve seen above, profit is simply society’s way of ratifying a firm’s past production decisions. It indicates what consumers want, and (by the process of imputation) the best process for producing it. Profits attract further investment in a given line of production, until the increased supply of goods in that industry brings the rate of return there back down to the level that exists elsewhere in the economy. This is how we ensure that our limited resources are not wasted, and that the most urgently desired goods are produced.

In the absence of profit as a driving force, how exactly would Che like to see resources allocated? We can either allow consumer preferences to guide production, or let the personal preferences of a monopolist (i.e., government) dictate what should be produced and how. When the question is posed this way, the choice is pretty clear, which is why the question is never posed this way.

Incidentally, would Che prefer to base economic decision making on maximizing losses instead? Would that be better?

There is so much more you have to read. Che was dumb, in his own way, but it was a completely different way than Che the Bloggista.

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Fact Check: Whose Economic Mess?

It’s the mess of the Democrats in the Senate and House. Randal Hoven explains:

Who controls Congress might just make a difference in economic affairs – more than who is President.  (The President still wields primary power in foreign affairs, as both head of state and commander-in-chief.)  Examine the graph below, for example.  It shows the unemployment rate over the last 25 years.  (Data source is the Bureau of Labor Statistics.)  I color-coded the line to be red when the Senate was Republican, and blue when Democrat.

Senate control and unemployment

And yet Democrats, both those in power and those who voted for the hopechange express, continually claim that Obama is not and never will be responsible for the bad economy. They will always blame it on Bush, no matter how long it lasts or how bad Obama and the Reid-Pelosi Axis make it.

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What would a Free Market in Healthcare look like?

We do not currently have a free market in medical care. If we did, the prices would be lower and the government wouldn’t have its fingers in every single medical care pie. Odysseas Papadimitriou lays out what it would be like if we restored a free market medical care system on The Street.

UPDATE: I liked it better before I read all the way through his proposal. It seems that everyone on his plan will die with huge debts to the government loan program. That is a big downside. Also it sets up way too many government strings for it to truly be a free market solution.

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30 Years to Electrical Grid Collapse and Renewable Energy Won’t Cut It

Ralph Ellis writes Renewable energy – our downfall? over at Watts Up With That. Anthony Watts introduces the article thusly:

For the record, let me say that I support some of the renewable energy ideas, even putting money where my mouth is, putting solar on my own home and a local school. However, neither project would have been possible without state subsidies. For renewable energy to work in our economy, it must move past the government  subsidy stage and become more efficient. It took over a hundred years t create our current energy infrastructure, anyone who believes we can completely rebuild it with the current crop of renewable energy technologies is not realistic. – Anthony

Mr. Ellis talks about all the technologies available, both the renewable and unreliable choices and the nuclear option. Then he gets down to the wall we are racing towards.

We have about 30 or so years before the shortage of oil becomes acute and our economies and Steam Powered Fire Engine societies begin to falter, and that is not very much time in which to alter our entire energy production industry. It is like relying on the Victorians to plan ahead and ensure that we still had a viable civilisation in the 1930s. And while the Victorians were both successful and resourceful, history demonstrates that new sources of raw materials were never actively planned until the old sources were in desperately short supply or worked-out completely. However, the introduction of a new, nationwide power generating system is an extremely long-term investment, and if we are to make this change without a dramatic interruption to our energy supplies (and our society) we need foresight, vision and a quick decision. What we need is a tough, educated, talented, rational leader to take a difficult but responsible decision to dramatically increase our nuclear energy production capability. However, what we have in the UK is Gordon Brown!

He has Brown. We have Obama, Pelosi, Reid, the Gaia worshipping Voluntary Human Extinction Green Movement, and the partisan media. None of these people or organizations can overcome their own rectal-cranial inversions long enough to see where we are going. They shall have to be expelled from any position of responsibility or influence if they don’t remove themselves voluntarily.

Highly recommended. Read the whole thing, including the very educational comments.

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Calling all Educators: Can the Science of Economic Success be Taught?

This naive* article at WaPo and Megan McArdle’s response have prompted a thought, as to what it would take for even impoverished hard-cases to get themselves out of poverty. For that is the true story of America, the rags to riches story. It’s the story of an orphaned boy who is so poor his shoes have holes in the soles, who starts by selling newspapers and apples on the street corner, becomes a wealthy and successful man, gives generously of time and money to charity when he is among the elite of his city, and opens an orphanage to take care of kids who are just like he was once. America is a place where that has happened and can happen again. It is not a place where people are trapped in poverty by class or legal restrictions; at least not yet.

To those who have taught teens:

Let’s say you were given the opportunity to teach the skills of success to a bunch of teenagers who are mostly aimless without any understanding of how to succeed in life. How would you go about it? Continue reading

Reason #1 to Open Up the Outer Continental Shelves to Drilling

Deroy Murdock passes this on in an excellent article about the world’s most productive and cleanest natural gas platform.

The American Energy Alliance reported in February that if Congress allowed oil and gas production on the Outer Continental Shelf, the U.S. economy would expand by $8 trillion, generating $2.2 trillion in tax revenues. This would give $70 billion in fresh wages to 1.2 million new workers nationwide. How stimulating!

That would close the gap and balance Obama’s incredibly high budget all on its own! What is amazing is how well the free market works if you just let it work instead of handcuffing it.

The whole article is well worth reading. Check it out!

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Trackposted to Nuke’s, Blog @ MoreWhat.com, Rosemary’s Thoughts, third world county, Woman Honor Thyself, Right Truth, The World According to Carl, The Pink Flamingo, and Right Voices, thanks to Linkfest Haven Deluxe.

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