David R. Henderson  

Are Taxes on Corporations Taxes on People?

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Thoughts on the New Commanding... Freedom for Happiness...

Last week, Mitt Romney, in a rare moment of passion, said that "corporations are people." Of course, they're not. But if you watch the 20-second YouTube, you'll see from context that he wasn't really saying that. He was really saying that taxes on corporations are taxes on people. He says, "Everything corporations earn ultimately goes to people." Then someone guffaws loudly and Romney asks him, "Where do you think it goes?" The guffawer or others in the audience answer, "In their pockets." Romney has him. "Whose pockets?", he asks. In other words, he's saying that in the phrase, "their pockets," "their" must be referring to people. That's why Romney then emphasizes "human beings."

Romney is absolutely right. And this means that taxes on corporations are taxes on people. I'm not getting at the subtle point--and I don't think Romney was either--that if capital is highly mobile internationally, a national government can't make capital bear much of the burden of taxes and so the incidence is on laborers and consumers.

No, I'm making the simple point that a tax on corporations is a tax on people. I remember that in addressing the issue in the 1980s, the late Herb Stein said that it's as if people think that if the government imposed a tax on cows, the tax would be paid by the cows.

Romney's passion and clarity on this are admirable. And until now, I've found little to admire in Romney. Now, the next step for him--which a patient in a wheel chair tried to help him see but he couldn't see--is to see that just as taxes on corporations are taxes on people, the war on drugs is not really a war on drugs: it's a war on people.


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CATEGORIES: Taxation



TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/5319
The author at Roth & Company, P.C. in a related article titled Corporations are people too! writes:
    Mitt Romney caught some grief for telling an Iowa State Fair heckler an obvious truth - corporations are people. They... [Tracked on August 16, 2011 10:56 AM]
COMMENTS (19 to date)
Dominik writes:

Milton Friedman makes the same point.
http://www.youtube.com/watch?v=YmqoCHR14n8&feature=player_detailpage#t=100s

PrometheeFeu writes:

In order to look good, Obama had had his supporters compile a list of requests and ideas which got delivered to his desk so he could look like he listened to the people before he tossed it at the bottom of a drawer. (Maybe I'm cynical and he actually read it and tried to implement some of it) One of the most popular ideas was: "No more wars on abstract concepts." Oh I loved that. Obviously, Obama didn't agree.

I think it's too easy for politicians to make up language which conceals the ugly reality they are promoting. When the FDA enforces certain "food safety standards" what that really means is that they burst into people's shops and steal the stuff which does not meet whatever standard they decided was necessary. If you try to resist their theft, they beat you up even if your customers want what you are selling.

Perhaps as a truth-in-advertising campaign, they should write at the end of all bills: "If you don't do what we wrote above and try to resist, we'll send our armed uniformed goons to hunt you down like a dog, steal your stuff, beat you up and kill you."

Gary Rogers writes:

My father always used to tell us that the only difference between taxing a corporation and taxing individuals is that you can control who you tax when you tax individuals. When you tax a corporation you still tax individuals but you can't control whether the individuals are the stockholders, the managers, the customers, the employees, the raw material suppliers or some other related party. However, corporate taxes always end up as a tax on individuals.

Jefff writes:

This is a silly debate. People are not profits. People are not income. People are not property. Taxing profits, income or property isn't taxing people. More importantly, it ignores the fact that when two or more people cooperate with each other, they can create more wealth than any individual can create alone. Most people understand the notion of teamwork. Apparently Republicans and libertarians do not. For them, there is no teamwork, there is only following orders.

Tom writes:

I'm sorry David, but both videos you linked to are pathetic. In both videos the participants are playing gotcha politics. The first one is actually about Social Security, if you watch a longer video. They are trying to get Romney to say something, in the heat of the moment, politically damaging about Social Security that could be used in a campaign add against him. The corporations are people came up in the context of a confrontation about Social Security.

In the second gotcha video they are trying to get Romney to say he would arrest a man in a wheelchair. I'm in favor of drug legalization, but don't you feel slimy trying to make a point about drug legalization using this type of cheap tactic?

Drugs are illegal. Romney was the governor of Mass. not the dictator of Mass. The legislature passes the laws. And let’s face it, most of the voters are not in favor of legalization. If that dude in the wheelchair needed pot that bad, he could easily score some reefer. That’s what I would tell him to do. I have no sympathy for any cause, even one I agree with, that uses cheap tricks to try and get what they want. These tactics rely on emotion and sound bites, not on reason and well thought out arguments.

Tom writes:

Jefff writes, "Taxing profits, income or property isn't taxing people."

When the government taxes cigarettes, who pay the tax? The cigarette or me? When the government taxes my income, who pays? The dollar bill pays or me? When the government taxes my home, who pays? My home or me?

Let me give you a little hint Jefff, I paid every time. I asked the cigarette to pay, but it refused.

Tom West writes:

While I quite agree with the fact that you are "taxing people" when you tax corporations, I feel that reality means that what is elegant on paper becomes less elegant in fact.

So, while "people pay taxes" *is* a truth that I think is very useful for more people to understand, I *also* think that there's the danger of failing to understand that if we have to tax, we're better off with lots of different smaller taxes than a few very large taxes that cause much greater distortions in behaviour.

Garth writes:

I think most people in favor of higher corporate taxes do realize that the corporate taxes are actually taxes on people, but the question they ask is which people. They assume that the burden of corporate taxes is eventually going to be held by the rich (owners, wall street, etc) and thus justify the corporate taxes just as they would likely justify higher marginal tax rates for the wealthy. What they may not realize is that when you tax the corporation the corporation now gets to decide (to some extent) on who bears the pain of the tax: they may raise prices, cut personnel, etc. Corporate taxes actually give the government less control over who is being taxed. Thus it may be in the government's interest to not tax corporations at all so they can maintain control on their ideal tax distribution. However, it could also be argued that corporate taxes are more efficient as those with relationships to the company who can most easily pay will end up doing so (if customers would balk at higher prices, the company may compensate through lowering wages or offering smaller dividends to investors, for example).

Tom West writes:

One thing I've never understood is if the corporation is already attempting to maximize profit, why would taxing the profit change any aspect of its behaviour (except in as much as corporate games can reduce the amount of observed profit).

In the main, if a company might raise prices or fire workers, etc. in order to raise profit in response to taxes, why isn't already doing so in the absence of taxes?

In other words, why don't taxes hit only the shareholders?

(I can see the long-term: less profit may mean less re-investment providing fewer jobs, etc. But the "imprecise tax" comment seems geared towards indicating who more or less immediately shoulders the tax.)

Mr. Econotarian writes:

The classical model implies that sales taxes (of which corporate income taxed are a type) are shared between seller and buyer, with the division depending on the relative elasticity of their demand/supply/price curves.

I suspect the division of share of taxes paid between capital investors and employees is similar.

Tracy W writes:

Tom West - the key difference is competitive pressure.
It's like a rise in oil prices, say. If a trucking company tries to just jack up prices to increase profits, then it is likely to be undercut by some competitors. But if everyone in the industry faces rising oil prices, then the competitors can't afford to undercut and still make a profit, so everyone has to raise their prices. Same with a tax.

Equally, if a company tries to cut wages or lay off workers all on its lonesome, it risks losing all its good workers to its competitors, or not being able to provide as good a quality service as its competitors (eg customers at the cafe have to wait longer for their food). If everyone in the sector faces rising taxes on labour, then everyone needs to be making those changes so the competitive pressure to not make them disappears.

Floccina writes:

An important part of politics in the modern USA is the art of hiding costs and making benefits obvious from and to the median voter. For this the Corporate tax is very good.

Dave Tufte writes:

This is **superficially** off topic.

Way back when, Firesign Theatre (a countercultural comedy troupe born in the 60s) had a routine on an album about totalitarianism with a faux commercial for an upcoming news report about the "hundred years war against the cows".

I think the metaphor is similar to Stein's.

There are a lot of sheeple out there would convert from vegetarianism if the legacy media pitched it as a war against the cows.

Justin writes:

Tom West - The problem is exactly that the games corporations play to reduce taxable profits.

The tax code needs to provide avenues for all sorts of businesses to be able to offset all sorts of business expenses before assessing taxes-- otherwise the $1 million in revenue that the manufacturer made after paying out $950,000 in salaries, equipment, etc. would have the same tax applied that $1 million in revenue that the software company made after paying $100,000 in salaries and servers. But since there are so many different types of companies with so many different types of legitimate expenses, the tax code ends up getting terribly complex just trying to be fair. That creates loopholes where, for example, the software company sells some intellectual property to a new corporation set up in a more friendly jurisdiction (Ireland) and then licenses that intellectual property back creating a $900,000 expense that zeros out the software company's taxable income. If the software company actually had to license this IP from a disinterested third party in order to compete, everyone would agree that the expense ought to reduce taxable income. If the shell corporation were in the US, there would be no problem because the shell company would just have to pay the taxes on the $900,000. But when you have thousands of pages of tax code trying to anticipate every sort of legitimate deal any corporation would make in order to figure out what impact that deal had on the corporation's taxable income, you're going to create thousands of opportunities for corporations to exploit the tax code for their own benefit.

Because corporations have such potentially high tax bills, it makes sense for them to invest a lot of money in smart people to find loopholes and structuring deals to avoid taxes. But all those behaviors are deadweight losses. Nothing useful is created when the software company creates the shell corporation to own its IP and many hours of work is wasted in pursuit of these loopholes.

Individuals have much less flexibility to structure their lives to escape taxes. Individuals are taxed on income not profits so the entire labyrinth of "allowable expenses" is not open for exploitation. The economy as a whole would be better served with no tax on the software company and simply waiting to tax the $900,000 when it eventually gets distributed to people in order to avoid tying up expensive human capital in finding and exploiting loopholes and to focus instead on improving other aspects of the company.

Dave writes:

The question then is, why as Governor of Mass did he raise taxes on corporations 3 times (so-called "loophole closing" bills). In fairness the Dems controled the legislature, but he signed them.

The key benefit of the corporate tax to a politician is as a punching bag and a lobby dollar magnet. Eventually, the ultimate incidence of the tax has to fall to consumers (though other stake holders may get stuck with the bill upon initial enactment). Many consumers will happily cheer on their own indirect taxation due to the pleasant thought of sticking it to the big bad corps.

Brandon Berg writes:

I'm not getting at the subtle point--and I don't think Romney was either--that if capital is highly mobile internationally, a national government can't make capital bear much of the burden of taxes and so the incidence is on laborers and consumers.

It's funny how little overlap there is between the group of people who think it's outrageous that dividends and capital gains are taxed at a lower rate than wages and the group of people who think we should eliminate the corporate income tax.

To claim that those who derive their incomes from investments pay an effective tax rate of 15% is to claim that the incidence of the corporate income tax falls mainly on labor. A leftist who believed this would support the elimination of the corporate income tax.

Since most leftists oppose eliminating the corporate income tax, it follows that they must believe that the incidence of the corporate income tax falls mainly on capital. But if they believe this, they cannot in good faith ignore the effects of the corporate income tax when calculating the effective tax rate of the investor class.

John Thacker writes:
More importantly, it ignores the fact that when two or more people cooperate with each other, they can create more wealth than any individual can create alone.

So you're in favor of corporations, then, because what are corporations other than two or more people cooperating?

Jeff, apparently you're the one who believes that there's no teamwork, only following orders, if you believe that corporations are only about following orders.

Tom West writes:

Tracy W - thanks. Your explanation makes perfect sense to me.

Tom West writes:

And thanks Justin, your explanation also makes a great deal of sense.

My understanding is one concern about taxing dividends solely in the hands of the owner is that none-nationals would escape paying any American taxes, as opposed to being (indirectly) dinged for the corporate tax.

I have no idea of this is actually a problem, and if so, how large.

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