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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!
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Comment Preferences

  •  Does everybody use the same alphabet when (0+ / 0-)

    communicating in written English?

    All dollars are derived from the Treasury and return there periodically (as revenue) to be counted and redistributed.
    Making a fetish out of currency does us a disservices because it disrupts the regular flow.
    Unfortunately, humans are able to make a fetish out of just about anything. We should decry that behavior, not reward it with accolades.

    by hannah on Thu May 08, 2014 at 02:18:36 PM PDT

  •  It doesn't make any sense at all (2+ / 0-)
    Recommended by:
    The Termite, Josiah Bartlett

    to suggest that taxes affect the price of products.

    Taxes are levied on profits, not on costs of sales.

    Ultimately, the profit of the company is its net income, and the tax on that income should be not that much different to any other income tax ... It is paid by the shareholders, who own it.

    I hope that the quality of debate will improve,
    but I fear we will remain Democrats.

    Who is twigg?

    by twigg on Thu May 08, 2014 at 02:51:27 PM PDT

    •  NO, Corporate income taxes are paid by the company (1+ / 0-)
      Recommended by:

      The shareholders obligation is to himself, to invest in the company with the highest return on HIS investment.  And the return is always after corporate income taxes.

      A company that operates more efficiently and earns a higher after tax return on capital than a competing firm with a similar tax situation will be coveted by investors.  This will be in spite of the fact that the more efficient company pays more in taxes.

      The value of a corporation is based upon the return investment after taxes.  If the corporation receives a lower tax rate because of special circumstances or specific tax loopholes, then the value of that corporation is inflated.  The return to the shareholder will be the same if growth in income is correctly valued.

      Claiming that the shareholders are paying the taxes just feeds into the argument of double taxation.  Which is BULL!!!

      The wealthy have been able to hire expensive economists to make that argument convincing to enough politicians and receive lower taxes on the earnings of capital compared to the earnings of labor.

      The republicons moan, the republicons bitch. Our rich are too poor and our poor are too rich. Ferguson Foont

      by Josiah Bartlett on Thu May 08, 2014 at 07:43:02 PM PDT

      [ Parent ]

      •  Yes, theyare paid by the shareholders. (1+ / 0-)
        Recommended by:

        The shareholders own the company, and the value of their shares, and the dividends are reduced, in part, by the corporation tax.

        No one suggested that the shareholders write checks to the IRS, the company does that. As it comes out of the profit though, it comes directly out of the shareholder value.

        I don't care how many economists and lobbiests have been hired, or what they have said.

        The bottom line is that the residual value, after all expenses are paid, belongs to the shareholders ... so they, by definition, bear the burden of the taxes.

        It cannot be described as "double-taxation" ... that is just a word salad with no meaning here.

        The company earns a profit, it pays taxes and what is left is the shareholders to disburse as they see fit.

        I hope that the quality of debate will improve,
        but I fear we will remain Democrats.

        Who is twigg?

        by twigg on Thu May 08, 2014 at 08:02:52 PM PDT

        [ Parent ]

        •  I strongly disagree!!! (0+ / 0-)

          The shareholders seek highest returns period.  If they can persuade lawmakers to reduce corporate taxes, they get a better return and their stock increases in value.  

          If they can't get lower corporate taxes, they lobby for preferential rates on returns on capital.

          If they can't get either of those or taxes increase, then their stock will decline in value and they face the prospect of holding on expecting growth in revenue will bail them out or they sell at a lower price to someone that will then get a better return and they look for another investment with a higher return.

          The wealthy have gotten economists standing in line to argue about double taxation but it's all just BS.  Investors are going to seek out the highest returns.

          It was pursuit of higher returns that drew so much money into the mortgage derivatives that sank the economy.

          Remember that Value = Income / (rate - growth).  Rate = the general cap rate that investors demand for a steady income and growth = expected growth in income whether it comes from the prospect of lower taxes or growth of the business.

          I want a better return on my labor.  Lower taxes would be nice but I know stockholders would lobby against that.  A tighter job market would help too but this recession has put a big dent in that.  And look who is opposed to jobs programs and even an increase in the minimum wage.  I want the deck re-stacked in favor of workers,

          So yes, if corporations pay more taxes investors will lose money.  If the job market is slack and government policies put the tax burden on workers, then I lose.

          I am a worker and about 98% of everybody else is a worker too! If investors and corporations pay more taxes, too bad, so sad.

          I'm for me and the rest of the workers.

          If I and other workers can do well, then the economy will do well.  Investors will end up doing well too but I'm still not worried about them.

          The republicons moan, the republicons bitch. Our rich are too poor and our poor are too rich. Ferguson Foont

          by Josiah Bartlett on Thu May 08, 2014 at 09:31:45 PM PDT

          [ Parent ]

      •  Aren't the Shareholders...the company? (0+ / 0-)

        We're splitting hairs here, I'm afraid!

        •  Nope, they are separate entities. (0+ / 0-)

          Is someone the company if they only own a few hundred thousand shares for about 4 microseconds?  They front run the market and gain a fraction of a penny per share but those fractional pennies add up.  And they are effectively financing it on FLOAT at ZERO interest.

          The market is focused like a laser on quarterly numbers and if there is just a rumor that a company won't meet those projections, the stock is dumped.

          There is so much turnover in stocks that there are very few real investors.

          I cry no tears for the rich man.

          The republicons moan, the republicons bitch. Our rich are too poor and our poor are too rich. Ferguson Foont

          by Josiah Bartlett on Thu May 08, 2014 at 09:44:49 PM PDT

          [ Parent ]

  •  As a college econ major... (0+ / 0-)

    ... I can attest to how boring economics can be, but it is really very useful when it comes to understanding not just markets but politics. Basic economic theory should be taught in every high school.

    Almost everything you do will seem insignificant, but it is most important that you do it.

    by The Termite on Thu May 08, 2014 at 02:55:35 PM PDT

  •  alas, the Sea World example illustrates the real (1+ / 0-)
    Recommended by:

    problem with corporate taxes----many of them don't pay any to begin with.

    In the end, reality always wins.

    by Lenny Flank on Thu May 08, 2014 at 03:18:22 PM PDT

  •  All taxes are ultimately paid by corporations (1+ / 0-)
    Recommended by:
    Josiah Bartlett


    In one form or another, corporations pay all these taxes.

    (-5.50,-6.67): Left Libertarian
    Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

    by Sparhawk on Thu May 08, 2014 at 05:34:40 PM PDT

    •  Excise and Sales Taxes are paid by consumers. (0+ / 0-)

      The rest come out of profits and are thus paid by the corporation, however one defines it.

    •  Complete 180 Degree Reversal (0+ / 0-)

      I always thought your kind argued that all taxes are ultimately paid by the individual.  Just which is it - corporations or individuals?

      BTW, just what is a "corporate" tax?  Are you claiming that the fees corporations pay in order to benefit from the corporate shield should be considered taxes?  On that basis, any payment made to the government for any good or service should be considered a tax, including tolls on modes of transportation.  

      "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

      by PrahaPartizan on Thu May 08, 2014 at 08:17:39 PM PDT

      [ Parent ]

      •  Without corporations, no one has a job (0+ / 0-)

        All money in your locality exists because of your local factory or whatever. Schools, hospitals, police, Burger King, whatever.  If local private industry goes away, all of those things go away.

        That's why corporations pay all the bills and taxes. If local industry goes away, so does everything else.

        (-5.50,-6.67): Left Libertarian
        Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

        by Sparhawk on Thu May 08, 2014 at 09:33:09 PM PDT

        [ Parent ]

        •  Should use the word businesses rather than (1+ / 0-)
          Recommended by:

          corporations - just to be technical.  Some businesses are partnerships, LLCs, sole proprietorships, etc.

          The most important way to protect the environment is not to have more than one child.

          by nextstep on Thu May 08, 2014 at 10:55:18 PM PDT

          [ Parent ]

        •  And local industry is going away at this point... (1+ / 0-)
          Recommended by:

          and all the tax holidays and incentives in the world can't prevent it. I also might add that one of the reasons that we have whatever prosperity we have is that there are millions of people who work hard and still remain below 150% of the federal poverty line. I say applaud them!

        •  Talk About Hyperbole! (0+ / 0-)

          Sure, so the only thing that matters is big business.  Whatever happened with that libertarian focus on small business, the little guy struggling to make it.  Besides, who's arguing that all local private industry should be eliminated?  That's a straw-man argument not worthy of you.  It's sure silly watching you make the exact same assertions in two separate paragraphs with virtually the same words.  I guess it hurts being left breathless because all of the assertions made so confidently over the years are being shown to be false, if not outright lies.

          "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

          by PrahaPartizan on Fri May 09, 2014 at 01:30:30 PM PDT

          [ Parent ]

          •  "Small businesses"... (0+ / 0-)

            ...are typically restaurants, hair salons, corner stores, and other consumer based organizations that subsist on the money generated by your local big business. These small businesses are as dependent on export businesses as the government is.

            But sure, machine shops, small tourism outfits, small software companies, all that stuff helps too. It's not the size of the business, it's the export nature of it.

            Besides, who's arguing that all local private industry should be eliminated?
            Hopefully no one because every single dollar in your community depends on it.

            (-5.50,-6.67): Left Libertarian
            Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

            by Sparhawk on Fri May 09, 2014 at 02:04:06 PM PDT

            [ Parent ]

      •  Excise and Sales taxes are paid by consumers... (1+ / 0-)
        Recommended by:

        cuz they're a tax on consumption (duh!) Yes, taxes are paid by people but the question is exactly which people? Depends on the tax, I guess.  I'm just arguing that the idea that a corporation can pass its income tax obligations on as higher prices is absurd!

        •  Shared Effect (0+ / 0-)

          As I recall from my classes in economics back before the last major extinction event, taxes on corporations were usually thought to be divided in their ultimate allocation.  The consumers of the business's products or services would pay a portion of the tax, but the business itself was estimated to pay the larger share of the tax levied.  That was one of the principal reasons for levying taxes on businesses in the first place - to make the shareholders pay for the services they were receiving from the society.  Clearly, some folks feel that businesses should pay no taxes because they generate a net positive good in society.  Of course, it always seems as if virtually no data backs up those assertions, which is why Picketty's book with its "wealth" of data is driving the conservatives wild.  

          "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

          by PrahaPartizan on Fri May 09, 2014 at 01:26:09 PM PDT

          [ Parent ]

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