One way in which the conservatives rally support for their efforts to reduce or even eliminate federal corporate income taxation is to appeal to populist sensibilities by erroneously claiming that corporations don't actually pay taxes; instead they shift the burden onto consumers through higher prices. At first this seems like a rational political strategy with which to fight against corporate income taxes or at least try to reduce them. Who in the middle class or among the working poor would join to eliminate or reduce taxes on billionaires unless they thought it was in their personal interest to do so. Tell America's working people that their bosses are pushing their income tax obligations onto them in the form of higher prices and all those poor folks might just join Mitt Romney & Co. in the fight against corporate income taxes (even though they are at an all time low with many large firms not paying a cent in federal income tax!) But the claim is patently absurd! It is the opinion of most competent economists that it is literally impossible for big business to pass their income tax obligations on to consumers in the form of higher prices so this is just another political scam. It is just another zombie myth polluting the discourse and bringing the level of discussion down to the lowest common denominator. Simple logic can easily dispel this silly idea!
In the first place, almost no economists believe that the incidence of corporate income taxation falls on consumers. Most studies show that the actual burden of the tax is unequally divided between corporate shareholders, the corporation itself and the corporations employees but never consumers. In 1962, Arnold Harberger, a conservative University of Chicago economist and colleague of Milton Friedman did a careful study of the incidence (distribution of the burden) of the corporate tax and found that it fell largely on corporate shareholders in the form of lower dividends and stock value. Other studies show some ratio of distribution between labor and management, but it almost never includes consumers of the corporation's output. Another free market economist, Bruce Bartlett (a former Reagan adviser), explains why;
"...most people assume that the corporate income tax is largely paid by consumers of its products or services. That is, they assume that although the tax is nominally levied on the corporation as a whole, in fact the burden of the tax is shifted onto customers in the form of higher prices. All economists reject that idea. They point out that prices are set by market forces and the suppliers of goods and services aren’t only C-corporations, which pay taxes on the corporate tax schedule, but also sole proprietorships, partnerships and S-corporations that are taxed under the individual income tax. Other suppliers include foreign corporations and nonprofits. Therefore, corporations cannot raise prices to compensate for the corporate income tax because they will be undercut by businesses to which the tax does not apply."Bartlett is largely correct although, like most economists that proceed according to neo-classical assumptions, he doesn't take into account that corporations have a significant amount of monopoly pricing power. However, that still doesn't allow them to pass their tax obligations on in the form of higher prices. Most corporations already charge the maximum that can charge for a unit of output and still retain a large market share. Raising prices further will result in reduced sales and lost revenue. But the real problem is that corporate income taxes are on profits (not on the item sold like excise taxes on alcohol and tobacco that can be passed on to consumers) that aren't known until the end of a fiscal year when prices have already been established. Thus, the corporate income tax is different from many other taxes in that it doesn't directly impact either costs or revenue. It is calculated as a share of gross profits and thus necessarily falls entirely upon the corporate rich be they shareholders or corporate executives. David Cay Johnston explains;
Taxes are on profits, and profits are calculated at the end of a tax year by adding up all the revenue and subtracting all the costs. When a product or service is sold the company doesn't really know yet how much profit, if any, it will have at the end of the year, so it doesn't know what the tax will be, so how can it adjust prices? But if a company was able to just raise prices based on anticipation of profits, then the result would be that profits would be higher because of the higher price charged, which means taxes would be even higher, so the company should have raised prices even more, but that means the profit would be even higher, so they have to go back and charge more, but then ... I think you are starting to see how silly this idea of raising prices to cover taxes can get.Any increase in prices to account for a tax on profits will just raise the tax higher to compensate for the higher revenue earned through the higher prices. It is utterly self defeating and isn't worth the risk of loss of market share to lower priced competitors.
Scott Maxwell of the Orlando Sentinel points out that if corporate taxes are actually going down using the example of SeaWorld in Florida who's "...corporate tax rates have decreased to the point where they are zero" according to Maxwell. He further points out that, "The CEO even bragged that his company “won’t be a taxpayer for several years to come.” Then Maxwell pointed out that like most corporations who pay little or no annual federal income tax, SeaWorld's prices have actually increased! Indeed, even as many large corporations file little or no federal income tax obligations over the course of multiple years, the price of their output increases! It is clear that there really is no connection between prices levels and corporate income taxes and there certainly is no potential gain for consumers in reducing or eliminating federal income taxes on large corporations.
Economist Uwe E. Reinhardt concludes with a great bit of wisdom on the subject. He points out that the federal corporate income tax, according to most reputable studies, "...ultimately rests mainly on the owners of capital." And then he continues with a highly relevant observation regarding corporate tax policy that runs in the opposite direction of the myth makers. This is especially important as such policy makers as Paul Ryan want to make all corporate profits earned outside the US non-taxable by the US federal government. Here is how Reinhardt explains the failure of the capitalist class to eliminate the federal corporate tax;
"...if the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.Under these circumstances it seems we would have much more to lose than simply the income tax obligations from existing, US domiciled C corporations! As with the current Ryan proposal, the future of federal income taxes on the corporate rich in general could disappear! As with most right wing cons, this one becomes transparent under scrutiny. The far right's "logic" is getting more and more pathetic!