"The Grand Tax Illusion

By Tim Worstall

Source: TechCentralStationDaily

"You will have seen, around and about, a lot being said about how the current recovery just isn't feeding through to the average man and woman out there. Wages don't seem to be rising; in fact, Paul Krugman recently made the astonishing claim that they haven't risen for the average man, per hour, since 1973. Rather than rootling around in Census Bureau data to show the inanity of this claim (largely because neither you nor I desire a simple rehash of something I wrote here back in January) I thought I'd try and offer something constructive. A solution if you wish, offered with humility.

Let us put ourselves into the position of those complaining. Wages should rise -- a noble goal. How, exactly, are we to achieve this? By what mechanism are we going to reshuffle the current distribution of income so that more flows into the moth-eaten wallets of the hardworking US citizens? Simple:

Abolish the Corporate Income Tax.

I know, I know, you're aghast at the idea that corporations won't be paying their fair share, that somehow they'll be getting away with something. In fact, they'll be getting away with precisely nothing. For, you see, corporations don't actually pay taxes. Only people pay taxes. This is an idea called "tax incidence". It means that people we think aren't being taxed are in fact coughing up the dough demanded by a specific impost.

Think of it this way. The money withheld from your paycheck for FICA and income taxes is in fact paid over to the IRS by the corporation that cuts your very paycheck, is it not? But no one thinks that it is the corporation actually paying those taxes, despite their name being on said check. Things become a little greyer with the corporations's own FICA payments for the joy and pleasure of employing you. Whether all of this comes from lower wages paid to you or whether at least some of it (but definitely not all of it) comes from the profits of the company depends on a few inelasticities which we'll not trouble ourselves to go into right now.

Yet we have established at least one point: whose name is on the check paying the taxes does not necessarily coincide with who is actually paying the taxes, yes? In the case of the corporate income tax we've also just been told who it is that really pays it and no, it isn't the company. Some of it is paid by the investors in the company, in the form of lower dividends or returns on their investment. But as a working paper from the Congressional Budget Office tells us:

"Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax."