You Can’t Tax a Corporation

Saturday, August 26th, 2006

In You heard it here first, Jane Galt refers to Greg Mankiw’s recent post, which points to a new paper that explains that 70% of the burden of the corporate income tax falls on employees. She says, “you can’t tax a corporation; you can only tax that corporation’s employees, shareholders, or customers,” and points to her earlier post on the subject:

As my favorite macroeconomics professor pointed out, it is impossible to tax a corporation because the corporation is just a fictional entity designed to pass profits back to its owners. When you say you’re going to “tax a corporation”, the corporation doesn’t go to the money farm to harvest some more cash to give to the government so we can expand job training for unwed mothers — some real person is going to pay that tax. When you put a tax on wages, such as social security or the unemployment tax, the employer doesn’t say, “oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a ‘sell’ rating” — they pay their employees less, both to lower the tax burden and to recover the lost profits. They hire fewer employees, because each employee is now more expensive. This costs real people money. When you up the corporate tax, either the employees pay, because the firm can’t afford as many of them; the customers pay, because the firms have to raise their prices to cover the taxes; or the shareholders pay because dividends are lower and the company is worth less. And before you liberal types start rubbing your hands in glee at the thought of those pained shareholders, keep in mind that the largest shareholders in companies are insurance companies, which invest in stocks in order to make the money they need to pay off when your house burns down; and pension funds, making the money to take picketing US Steelworkers off the streets and put them into good homes. The other big holders are mutual funds, which is what most of us have our 401(k)’s in. So when you say “I want to tax corporate profits”, try silently saying to yourself “so that Mom can sell the condo in Florida and move in with me.”

If the goal is “to redistribute money from the company’s richer owners, customers, and managers to its poorer employees,” then we already have a way to do that: “It’s a little thing I like to call the progressive income tax.”

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