It’s budget time again and in many states, you’re probably already hearing about taxes.
We’ll hear the sob stories from corporations asking for “relief” from the heavy “burden” of taxes. And we’ll likely hear more about the unbelievable land of freedom and jobs and growth we will reside in if we can just get to zero tax land.
No sooner do the old lies die than some new myth arises.
One of my recent favorites is that consumers pay the price of corporate income taxes.
Economists don’t agree on much. But they do agree on one thing. Prices are set by supply and demand. Taxes on corporations are not passed on to consumers. On a surface level, however, I can see how many people might think corporations pass on taxes.
Ask yourself this question though: Did prices ever go down when we passed corporate tax cuts or go up when we raised corporate taxes?
No. Why?
Steve1960 writes about why in this excellent diary. I am going to paraphrase him here:
Corporate taxes are paid on profit. You know costs in advance but you don’t know profits. Taxes are not a cost, but are paid on profits. Prices get determined by your costs + a profit margin. If you move these costs up, you lose market share but gain margin. If you move them down, you gain market share but lose margin.
In other words, what determines price is supply and demand and margin and market share. Corporate income taxes are paid after the fact and only on profit.
So what do corporate tax cuts do?
Well, I kind of gave it away in the title. I think it’s worthwhile to walk through though because it’s tricky and most people buy the “common sense” marketing pumped out by corporate special interest groups.
Taxes have to be paid by people since corporations are nothing more than paper entities. However, there are two other groups of people to consider other than consumers: shareholders and employees.
Many people assume that corporate taxes will be paid by consumers. Economists don’t agree on much, but they agree that this isn’t the case. Bruce Bartlett explains it this way:
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. It should also be noted that the states have substantially different corporate tax regimes, including some that do not tax corporations at all, and we do not observe that prices for goods and services vary from state to state depending on its taxation of corporations.
This leaves shareholders and employees.
In 1962, economist Arnold C. Harberger argued that the corporate tax was born entirely by shareholders; it simply reduced profits.
Since Harberger’s paper, other economists have argued that labor bears some of the costs. Though economists disagree on the ratio, if you average the estimates, it's close to 20 percent labor and 80 percent shareholders. The tax policy center methodology estimates this same 80/20 shareholder to labor split.
Most of the impact, either positive or negative, (80%) is on shareholders. It ultimately rests on the owners of capital.
Translation: Corporate taxes matter to Wall Street. Cutting corporate taxes benefits shareholders and juices Wall Street.
Supply-side economics
But don’t believe me. If we’d listened more to one of the founders of supply-side economics, Wall Street Journal reporter Jude Wanniski, we’d of known this all along.
In 1978, Jude Wanniski, one of the founders of supply-side economics, penned the article “A Bull Market Scenario” in the Wall Street Journal. The question he asked was:
What will it take to get the Dow Jones Industrial Average to a level of 3000 or 4000 by the early 1980s?
Wanniski theorized that when something has happened before it could happen again. What he was referring to was a nearly five-fold rise in the stock market from 1921 to 1929 under Calvin Coolidge. Coolidge believed “generally speaking, the business of the American people is business” and lowered taxes to the point where in 1927, only the wealthiest 2% of taxpayers paid any federal income tax.
Wanniski’s idea was to duplicate the Coolidge plan:
As in the 1920's, we can expect a gradual, then accelerating dismantling of the government barriers between effort and reward. An era of incentives. The most important of these barriers are the now unnecessarily high federal tax rates on capital gains, personal incomes, and gifts and estates. Also a diminution of federal regulatory barriers to commerce.
Sound familiar?
If you want the stock market to go up, the way to do this is to cut taxes on the wealthy and corporations (the capital gains tax, income taxes, corporate taxes, estate taxes, etc). These taxes allow people to purchase more shares and juice the stock market.
Certain tax cuts benefit Wall Street. Look for the push to cut these taxes.
Taxes that don’t fall into this category are the taxes paid by everyday people: sales taxes, property taxes, sin taxes, government fees and tolls.
Look for these taxes to be raised.
Example: Florida
Isn't cutting taxes the way to create jobs? Won’t it unleash the power of the market? Won’t it lead to huge growth and prosperity for everyone?
Well, we don’t have to wonder. States have done this. Florida, for example, has for all practical purposes eliminated corporate income taxes.
Less than 2% of all for-profit corporations in Florida paid any corporate income tax at all in 2010. Out of 1.3 million companies, only 24,112 paid any corporate income tax according to the state Department of Revenue.
Let’s see how Florida is doing:
- Florida’s unemployment rate of 6.2% in June 2014 exceeded the national rate, ranked 29th out of 50 states.
- Beginning in 2008, Florida’s job loss rate has been higher than the national rate.
- The average wage in Florida is 87.7% of the U.S. average.
- The number of Floridians filing for foreclosure was the highest of any state.
- Florida ranks 49th in spending on education.
- Florida’s poverty rate is exceeded by only 17 states, having climbed from 12.8% in 2001 to 17.1% in 2012.
- According to the U.S. Census Bureau’s supplemental poverty measure, Florida is the second most poverty stricken state at 19.5%.
- Florida ranked 3rd in a study measuring the gap between the income of the top 1 percent of Floridians and the bottom 99 percent.
In Florida, there is no correlation between cutting corporate taxes and job growth or cutting corporate taxes and the health of the state.
As Scott Maxwell asked Floridians in 2011, what are you getting?
To help keep corporate-tax rates low, you've already started paying more for your drivers license, to enter a state park, even to file a lawsuit.
And now, your child's school may have fewer teachers. The social worker and highway patrolman will take home less pay. Funding for veterans, elderly and the poor may get cut.
And why? Because some politicians are still arguing that business taxes are too high, hoping you won't pay attention to the statistics and numbers that prove otherwise … numbers like 2 percent.
Carnival Cruise earned $1 billion in profits and didn't pay a single penny in taxes to the state. Seaworld Orlando also pays no taxes and has figured out how to pay little in federal taxes. CEO Jim Atchison
said:
We won't be a taxpayer for several years to come. That's a great advantage for us.
When most of us make more money, we pay more in taxes. Yet these rules often don't apply to our largest corporations.
As Scott Maxwell wrote: “It's a system where the winners are the guys with the best lawyers, lobbyists and accountants.”
A few closing thoughts on talking to people about taxes
We've talked about how tax cuts for corporations do little more than juice the stock market. This gives you a good “in” to challenge one of the common myths: that corporations pass on corporate taxes to consumers.
You will have more success, however, if you have a better story about why corporate taxes are a good thing than if you only challenge the conservative belief.
Here are a few thoughts to help:
- Corporations exist for the benefit of the people of our country.
- Corporations are a privilege. Early in the history of our country, it was very difficult to incorporate because our founders feared monopolies like the British East India Company. Gradually organizations were allowed to incorporate providing they serve a public good.
- Taxes are on profit and should gradually increase as a business grows and matures.
- Small businesses need help more than large businesses.
- You can’t “opt out” of America.
- Corporations that lobby to “opt out” should have their corporate charters revoked.
- Our tax code should benefit all of us.
- Regulation and oversight is needed for a working economy that benefits everyone.
A few questions to spur discussion:
- Should the economy work for people or do people work for the economy?
- Who do increases in the stock market benefit most?
- Why should we care about growth if growth only benefits a few people?
- Do you really think you are ever going to pay less in taxes? Or are you going to pay more in property taxes, sales taxes, sin taxes, and fees to make up for all the money going to Wall Street?
As always, you will have more luck convincing people if you stay out of the tribal Republican/Democrat game.
Ask questions, talk about ideas and educate!
---
David Akadjian is the author of The Little Book of Revolution: A Distributive Strategy for Democracy.