When the subject of corporate taxation comes up, we often hear the cry that it is only passed on to the consumer. Well, that is not quite true. I discussed the subject with Jack Norman, who pointed me to a Wisconsin Department of Revenue study, Wisconsin Tax Incidence Study. Simply put, the study suggests that there are three possible outcomes as to how tax increases are handled by a corporation.
The three outcomes are:
The Regressive Variant assumes that business passes on virtually all of its taxes. The Progressive Variant assumes that business owners keep almost all the tax burden themselves. The so-called Plausible Variant is a blend of the two.
Regressive Variant: 46% ultimately paid by consumers; 28% by labor; 0% by in-state corporate owners; 26% by out-of-state corporate owners
Plausible Variant: 29% paid by consumers; 15% by labor; 13% by in-state corporate owners; 43% by out-of-state corporate owners
Progressive Variant: 3% paid by consumers; 0% paid by labor; 28% paid by in-state corporate owners, 69% paid by out-of-state corporate owners.
Last week I supported taxes for Wisconsin corporations, Another Incomplete Wisconsin Tax Analysis and Rick Esenberg responded with The corporate goose:
But what happens when I tax that mysterious vehicle of modern evil - the corporation...So it must either short employees or shareholders or pass the cost on to customers...
Making Rick one of the few who recognizes that increased corporate taxes are not just shared by the owners and the consumers, but also labor.
Having earlier made the point that double taxation occurs since the corporation pays and then the consumer pays, Rick suggests that the best place to tax wealth is where it comes to rest, not where it originates.
That of course means that the poorest consumer and wage earner will ultimately pay the tax, resulting in little progressivity. It also means that they will additionally pay greater taxes, since the system of deductions and exemptions is skewed to the wealthiest. My neighbors, small shop owners with Ma and Pa businesses, are in no position to take advantage of the real estate tax breaks that farmers and developers get when the state of Wisconsin abolished the real estate taxation uniformity provisions in the state constitution.
Similarly, most of us do not see the benefits of the M&E (machinery and equipment) exemption.
Rick and I might come to agreement that the solution is a uniform sales tax that exempts housing, food, and health. Generally speaking, the wealthiest among us spend a disproportionate amount of our income on non-exempt items, making the impact fairly progressive relative to income.
But until we overhaul the tax system, we are stuck with the mismanaged income, sales, and real estate tax system, so taxing corporations is the only way to equitably gain needed revenue to educate our children, plow our streets, and combat public health menaces.
I will continue this discussion with Rick this week as he raised other important questions: The Market for Taxes and The Beast is Holding Its Own.
Interesting analysis, however your closing statement, "so taxing corporations is the only way to equitably gain needed revenue to educate our children, plow our streets, and combat public health menaces.", leaves much to be desired. Throwing education in with snow plowing is the biggest stretch of the imagination I can even conjure. Education is a 6 billion dollar gorilla hanging around our necks here in Wisconsin. We could freeze spending for 10 years and that still would be too much. The confiscation of our tax money purportedly for "the kids" is just a guise. No sir, education only needs to gain free market competition without taxpayers being penalized.
Posted by: Chris | October 22, 2007 at 07:21 AM
Chris: I admire your candor. It is nice for a change, to see someone acknowledge that a part of the 'anti-tax' agenda is to end public education.
Posted by: Paul | October 22, 2007 at 08:26 AM
Connecticut, Massachusetts, Minnesota, New Jersey, New York, North Dakota South Carolina, Tennessee and West Virginia all exempt textbooks from sales taxes. If increased sales taxes are being considered I think this would be a much better exemption than many already in place. I'd even extend it to all books.
Posted by: Thomas J. Mertz | October 22, 2007 at 09:13 AM
I'll take the education gorilla instead of the war gorilla any day.
Posted by: Dan Sebald | October 22, 2007 at 10:05 AM
This double-taxation garbage is the same load of b.s. the conservatives trotted out during the estate tax debate and it really needs to be stood up to.
Yes, the corporation pays income taxes, they then give some of the money they payed taxes on to their workers, who pay individual income tax on it then spend some of it at a corporation-owned store where sales tax is assessed on it before the corporation pays income tax on it. This happens in dozens of different ways and you could probably trace money through dozens of points of "taxation". The point is, except for asset-based taxes like the property tax, *WE DON'T TAX MONEY* we tax transactions, usually only once.
This works because, contrary to the Esenberg model which imagines a corporation as the wellspring of wealth, gracefully allowing that wealth to trickle down to the stagnant, festering pools of the working poor where it (apparently) dies, the economy is actually cyclical.
Wealth is created when someone actually produces something, be it a product or idea, and is then pushed around from entity to entity within the economy until it ends up landfilled or something of the sort until someone finds a way to use the landfill. Corporations and other companies are vital drivers in this system but they're no more fundamental than any other part. Even the government isn't a black hole of tax dollars but takes a portion of economic activity for use in maintaining the infrastructure (roads, schools, utilities) that make commerce and civilized life possible in the first place.
I could write a book on the incredible sense of entitlement current held by our nation's wealthy elite but I'll simply say that we really do need our infrastructure (all of us) and it doesn't make any sense to place the entire burden of paying for it on people who can't afford to.
Posted by: Peter Gruett | October 22, 2007 at 11:25 AM
Being no economics expert myself, I would think elasticity of prices comes into play. There are some goods and services for which businesses can only pass so much of the increased cost of taxes onto the consumer. Also there is the consideration how much a group of companies within a market control that market.
Maybe the best approach is to eliminate all corporate taxes and make it up in a much more progressive system of taxation. In there would be increased taxes for dividend interest which represents income for the shareholder.
As for the so-called death tax there is a bit of built-in nonsense to the argument that you are taxing the dead.
In short, no. The dead are dead. Like all taxes that work the way they should, the levy should be laid on those who benefit from the money -- the heirs.
Posted by: kr | October 22, 2007 at 01:07 PM
Paul, I urge you to take a look at revenue neutral carbon tax. Use it as a substitute for the sales tax in Wisconsin. It make sense if you are concerned with gobal warming yet would not be detrimental to the state economy. Please go to the carbon tax center, http://www.carbontax.org
Posted by: Dean Weichmann | October 22, 2007 at 08:04 PM