So who does pay the corporate income tax? The question seems simple, but the answer turns out to be exceedingly complicated.
Nearly all economists agree that it isn't corporations. After all, they are really only a legal convenience—a way to organize owners, plant and equipment, and workers into one coherent entity. Ultimately, the tax has to be paid by people. But which ones? Owners? Workers? Consumers? All of the above?
Last month, the Tax Policy Center and the International Tax Policy Forum brought together a roomful of heavyweight economists, tax lawyers, accountants, and government policy analysts to see if they could conclusively answer the question. They couldn't. (Download the zip file.)
If there was any agreement, it was this: Shareholders and other investors bear most of the burden of corporate taxes at first. But over time, as companies find ways to move their capital overseas, more of the tax is paid by labor, which can't move so easily.
A new paper by Harvard Business School professors Mihir Desai and C. Fritz Foley and University of Michigan professor Jim Hines concludes that a big chunk of corporate taxes is eventually paid by workers—mostly likely about half, but perhaps as much as 75 percent. Other studies suggest it is much more—in excess of 100 percent in some cases. Still others argue that investors foot most of the corporate tax bill.
This question has been vexing economists since Arnold C. Harberger first wrestled with the subject 45 years ago. And it is only getting more difficult. Here is one example of why. Many investors are non-profits, retirement funds, or foreign owners. A college endowment, for example, would earn lower returns after the company in which it invested paid tax, but who would really bear the burden? Would it be students who might have to pay higher tuition? An even bigger problem: The immensely complex and interrelated worldwide economy makes it easier than ever to move capital to low-tax jurisdictions.
There are lots of technical assumptions involved in all of this. But it is much more than an academic exercise. Policymakers, without actually knowing who pays the corporate tax, are sure to be tinkering with the levy in coming years. Who will win and who will lose if, say, they decide to cut individual taxes and offset the lost revenue with a hike in the corporate tax? Who knows?
