The voices of Tax Policy Center's researchers and staff
After the Government Accountability Office reported last month that two-thirds of corporations in the
Eric Toder countered on TaxVox that it was all much ado about nothing (or not much). But there is a real question there: “Who pays (or doesn’t pay) corporate income taxes?”
The answer is less obvious than it might seem. Sure, companies write the checks, but the money eventually comes out of people’s pocketbooks. Whose?
Individuals bear the burden of corporate taxes in one of three ways: as owners of capital who get a lower return on their investment, as workers who receive lower wages, or as consumers who pay higher prices.
Economist Arnold Harberger showed more than 40 years ago that in a hypothetical world with impermeable borders, no trade, and a fixed stock of capital, capital owners bear the full tax, whether they are part of the corporate sector or not. Capital moves from the taxed corporate sector to the untaxed non-corporate sector until the after-tax return to additional investment in either sector is the same. Less capital in the corporate sector raises the return to the remaining capital while more capital on the non-corporate side lowers returns to investment in that part of the economy. All owners of capital bear the cost of the tax in terms of lower net returns.
Open up the economy so that capital can move among countries—but labor cannot—and the picture changes. Capital again moves until returns are equal everywhere, leaving less capital at home. With less capital to work with, domestic workers become less productive and their wages fall. Meanwhile, workers in other countries benefit from having more capital and their wages rise. In such a situation, as CBO economist Bill Randolph has shown, domestic workers might bear 70 percent of the corporate tax through lower wages, foreign workers can gain an equivalent amount through higher pay, and capital owners worldwide share the full burden of the tax in lower returns. What actually happens depends on how readily capital can move, how easily capital can be substituted in different uses, how willing consumers are to substitute domestic and foreign goods, and a host of other factors.
Figuring out just who pays the corporate tax is very complicated and contentious (just try reading this review of the economic literature) and economists have yet to reach consensus. Different models and different assumptions about substitutability of capital, labor, and goods lead to different conclusions. A 2006 analysis concludes that, primarily because domestic and foreign goods are imperfect substitutes, much of the burden of the tax falls on capital. In line with that conclusion, the Congressional Budget Office and TPC allocate all corporate tax to capital in their distributional analyses.
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