Big Companies Pass The Buck

Corporations don't pay taxes - you do.

As the final primary days come to a close, the Democratic candidates are reaching deeper and deeper into the bag to find red meat for the base.  All the usual dripping steaks are there - attacks on evil drug companies and oil producers, slamming polluters of all kinds, proclaiming the importance of union strength and competition-free public schools, government health care for all, and so on down the line.

But in the Democratic playbook, there is no mantra more hoary than that of "tax the rich", and right next to it is the concept of taxing those evil corporations.

Obama is arguing for it; so is Hillary.  Both also want to increase taxes on offshore operations of American companies, unlike most other developed nations.  The Democratic Congress is playing the same game.

You'd think that with all the enthusiasm to tax corporations, the Democrats are out to take from the fat cats and give to the little guy; and indeed, that's the way their argument goes.  However, those who wish to increase government revenues, or even to play with social engineering, by increasing corporate taxes, are forgetting one small little detail:

Corporations do not pay taxes.

This statement may at first appear to be an argument along the lines of, the rich pay good lawyers so they don't have to pay taxes.  But it isn't.

It's a fact that, lawyers or no lawyers, almost all profitable corporations do wind up having to write a whacking great check to the U.S. Treasury every year.  So in that sense, corporations do pay taxes, in that it's their name on the bottom of the check.

The issue at hand is, where does the money come from?  And here, corporations have an inherent advantage over an ordinary person.

When you, as a normal person, go out to find a job, how much control do you have over your salary?  Obviously you have some influence over it; you can reasonably expect to make more money by increasing your educational level, or by working conspicuously hard.  Similarly, if you are drunk on the job, you'll probably get sacked, and if you steal from your employer you'll have a hard time finding another one.

But most of the time, for most people, your pay is whatever you are offered.  To increase it, you either have to hope for a raise or promotion, or take great trouble to find another job elsewhere with all the risks and bother that entails.  When income taxes are increased, your salary doesn't go up - that tax increase comes straight out of your hide.

When corporation taxes are increased, the corporation pays the bill at first.  But the buck doesn't stop there for very long.

Unlike normal people, a corporation has some level of pricing power.  That is, the company can simply increase the price of whatever it is that they are selling to cover the increased taxes - but the profit remains the same.  If the government raises corporate taxes across the board, then naturally all the companies will raise prices accordingly - with a minimal, if any, effect on their bottom lines.

But on the other side of the table, who is stuck paying the bill?

The prices for gasoline, milk, and all manner of other consumables have gone up enormously over the past year or two.  Did the oil companies and grocery stores suffer?  No, they increased the sale prices and moved on.  Corporations can do that.  Normal workers, unless you are a very high-flier, can't.

The reason for this is obvious.  Most companies have competition - but there's a limit to the competition.  How many stores compete with Wal-Mart?  Half a dozen?  If you include the Internet, hundreds maybe - but how many people are there in this country who could replace you in your job?  Hundreds of thousands at the very least.

And for an increasing number of Americans, they are not merely competing with other Americans for work, but with illegal immigrants, and people overseas - all of whom are willing to work for far less money.  Only someone at the very, very peak of their profession - someone like Warren Buffett or Jack Welch - need have no fear of being replaced in their job by someone less well paid, or being able to find another job paying more.

When politicians start looking at corporations with a greedy eye, it may sound appealing - but it's your pocket they'll be picking.  If they taxed only yacht-builders and caviar distributors, then they might have a point; but if the target of the taxes is a company producing anything you ever buy, they might as well just send you the bill in the first place.

So is all this to say that corporate tax levels are irrelevant?  No, not in the least; the point here is that it is foolish to view corporations as a bottomless piggybank that the government can dip into at will.  The corporate tax level can have a very profound effect on the economy, even though the taxes are really being paid by the corporation's customers.  But we'll discuss that in a later article.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments
Not "most" comanies, EVERY company has competition. Walmart competes with Target - both of whom are BUILT on the premise of lowest prices. You can bet your bottom dollar that Walmart and Target are not passing along every tax and regulatory fee because the entire premise of what they offer is LOWEST price.

Same with grocery stores. Those go out of business all the time and the price differences between them is miniscule. One of the largest casualties OF food inflation IS the grocery stores. They have been merging and folding right and left over the past few years. Stores like Food Lion could no longer compete so they split in half and formed a higher end chain called Bloom, formed a low end called Bottom Dollar and sold off a lot of their other assets.

The idea that corporations don't pay taxes is ridiculous.

Oil companies are about the only thing that fits your model and that is because their distribution model is directly built on top of local and state tax brackets. They have been targeted with special taxes for decades so they learned a long time ago that they HAD to pass taxes on to the consumer. Also, the oil companies that sell to consumers (gas stations) do not always sell their own product. Gasoline is fungible at the regional level which forces all stations to use from the same regional suppliers.

The majority of corporate wealth lies with SMALL corporations, not big ones. And those feel the most pain when it comes to taxes and regulatory fees because they CANNOT pass it to their customers.

You are correct that the government should not see corporate tax as a bottomless piggy bank.

You are also right that taxes get passed along to the consumer, but FOR A DIFFERENT reason. The reason they are passed along is because corporations ARE MADE UP people. The big ones are owned publicly and make up the retirement wealth for millions of consumers. And the little ones ares joined at the hip with their owners so whatever the corporation has to pay, the less the owner has to retire on or feed his family.

Good premise, bad approach.
March 4, 2008 10:56 AM
Of course corporations don't pay taxes, as the author said. Where do they get their money in the first place? They can't print it like the government does... they have to get it from YOU.

And the author discussed the presence of competition - but most companies do not have nearly so many direct competitors, as most workers have direct competition for their jobs. So there's a good point there.

Also, at the end of the article the author alludes to an upcoming article relating to how corporate taxes affect the economy. So there's obviously more to come.
March 4, 2008 11:40 AM
This makes for good argument for a flat sales taxes, which makes taxes based on consumption rather than income. Something like the Fair Tax. It would make taxes visible to everyone, even the common Joe consumer that doesn't think about it. The hidden fees everyone is paying would be removed, and the actual cost of goods + tax would probably be the same as or less than the existing cost of goods + all the hidden taxes and fees that are factored into the price currently.
March 4, 2008 12:05 PM

The "fair tax" should only be uttered or thought about with repeal of the 16th amendment - the income tax. If it's not repealed, it won't be long before we have both...
March 4, 2008 12:30 PM
Forgot the link:
March 4, 2008 12:31 PM
Sorry, Patience, you logic is barely hanging on. By the VERY same argument one could say that NO ONE pays taxes because NO ONE prints their own money.

For instance...

Do YOU pay taxes?? No, you get your money from your employer so THEY are paying your taxes. After all, you don't print money. And if you didn't get paid that money by your employer, you wouldn't be paying any taxes.

March 4, 2008 1:24 PM
I am also a heavy advocate of the Fair Tax. It is the only proposal for a tax system that I have ever completely, 100% agreed with. Philosophically, it penalizes consumption over labor (the better of two evils). And practically, it exposes every US citizen (drug dealers, pimps, cash-only workers) to all share the same tax burden.

I believe (but don't quote me on this) that the Fair Tax DOES call for the 16th amendment to be deleted as part of its overall proposal.

Fennoman is right. Without shredding the 16th, it's pointless to move to any other system. The Democrats will just figure out how to have both.
March 4, 2008 1:31 PM
I suspect that all of us posting here would agree with the sentiments on the Fair Tax: it's a good idea, but it's a bad idea as long as the 16th Amendment and income tax still exist. If we could ditch the one and change to the other, we'd be all in favor.

That said, the question of "who pays taxes" is really one of marginal cost. When a tax is increased, who ends up with less to spend? Because corporations have (to a greater or lesser degree) pricing power, whereas almost all workers have none at all, by definition the majority of the pain is borne by customers not the corporation. Simple logic.
March 4, 2008 2:36 PM

I think you're making semantic arguments about "who" pays. I'm an employer. I pay my employee $10.00/hr. Of that, I'm supposed to pay 7.5% (or so) in "payroll taxes" (Social Security, ha!). So, my cost for the employee is $10.75. Now, Where does that extra $.75 come from? I pass that cost along to my clients in the form of higher fees. The employee doesn't pay it. My clients pay it, indirectly, through me. But I'm not losing the $.75 from my profits.

This is the same for all corporate taxes. The end client pays those taxes in the way of raised prices. The argument isn't who writes the check, it's who actually has the money taken out their wallet--that's who the taxpayer really is.
March 4, 2008 2:37 PM
Yes, I am actually making semantical arguments to prove that there is no difference between personal and corporate tax ultimately.

Let's take your business as an example...

If tomorrow, the government decided that you had to pay 10 times as much tax as usual, would you simply sit down and raise all your prices by that amount? No. You couldn't. You _might_ if you thought you could get away with it, but you would have to consider all of the other things that go into setting prices - the most important of which is competition. If you raised your prices by 10 times and your competitors did not, then your customers would all leave and go to them. And you would be out of business. Instead, you would choose as a rational employer to raise your prices a little (if you still were competitive within that range) and take the rest from your profit. Or you'd have to cut jobs and move money out of your productions line.

And therein we see the real problem... By viewing corporations as the author does, readers fail to see that the corporation as an entity (not the consumer) usually pays because the corporation has to cannabalize itself in order to (a) remain competitive and (b) pay the higher taxes.

As a business owner, I'm surprised you do not more readily understand this. I have been a business owner too, multiple times. Very rarely, can a business simply "pass along" tax increases to the consumer. Most of the time, since the business is being as competitive as it can already, the business has to take the money from somewhere else internally.

In my opinion, it's dangerous to view coporations as being a "special case" or something different when it comes to taxes and revenue because that leads to the idea that they are a piggy bank that can be kicked whenever someone wants a handout. Corporations are just groups of individuals that join to together to collect and build wealth. They should not be viewed any differently than an individual person who collects and builds wealth on his/her own.
March 4, 2008 3:33 PM
Economists with lifetimes of studying the subject can't agree who REALLY pays taxes; scragged has summed up years of economic debate in a few screens.

Since most voters seem to feel that corporate taxes don't cost them anything, it is good to get the issue on the table. Lfon is correct that taxes cannibalize what the company is able to do so hat the company cuts back in the short run. Cutting back usually means cutting head count which hurts people. The ones let go are unemployed, the ones who stay have to work harder. Either way, it comes out of the employees' hide.

Nobody's asked about the result of government taking money away from people - does the nation as a whole end up better off? Maine, Vermont, Massachusetts, and New Hampshire reveal the answer. NH has much lower governmetn spending per citizen than the other 4 states, but nobody has been able to find a reliable measure which indicates that NH people are less well off. Thus, the extra money the governments of the other states take from their citizens does the citizens no good at all.
March 4, 2008 4:05 PM
There is no difference between businesses and individuals. That is a load of garbage. Anyone who runs a business knows that there is a megaton of competition on your shoulders. In the United States, individuals, in many ways, have more opportunities to reduce competition than business do and there is no guarantee that a business will suceed. Quote the opposite, 90% of all small businesses fail. But individuals have very little, if any problem, getting a job. Poll: how many readers or writers of this blog have had a problem getting a job (any job) if they really wanted or needed one? Businesses, on the other hand, have no reasonable assurance of making money and most of them are locked into small, niche markets where they struggle for decades to woo customers.
March 4, 2008 4:13 PM
TM makes a good point about cutting jobs coming out of the employees' hide ultimately. I did not consider that. So I guess the algorithm goes like this - if the company is profitable when the taxes are increased, the company can choose to pass along the taxes to the consumer or (if they can't) they eat the profit in which case it hurts the company shareholders instead of the consumer. Otherwise, the consumer one way or another (either by getting increased prices or getting fired from a job) will pay ultimately. Maco economics is a very cool thing to study.
March 4, 2008 5:38 PM
Someone just forwarded me your URL. The reader called "Patience" said that paying taxes is about marginal cost. I have a Masters in Econ from KU. I have no idea what you are talking about. Please, enlighten me how corporations can produce tax monies at cheaper per-unit rates than individuals.(macroeconomically, if you will).

"wynton" got it right. There is no difference, macroeconomically, between individuals and corporations. If you follow where the money comes from and how individuals and corporations mitigate that loss, it's all the same.

Politically speaking, it's worse taking it from corporations only because the trickle-down effect starts higher and so it covers more points.

-Cary Lexfield
March 5, 2008 7:57 AM
As stated before, macroeconomically there is no difference between taxes assessed on corporations vs individuals.

MICRO economically, and politically, there are huge differences, for the reason that, generally speaking, corporations have more pricing power than do individual workers.

When a tax is increased, what is the marginal cost TO THE CORPORATION? Well, when there was previously no tax, and a new one is enacted, the intial cost is the cost of the tax plus the cost of compliance (less the price raise). But when an existing tax is increased, the cost of compliance doesn't usually go up - you fill out the same form, more or less, you just get a different number at the bottom.

So if the tax goes up by, say, $10, then is the marginal cost $10? For companies, not usually. Insofar as they have pricing power, they can and will simply raise prices - by $2, $4, the full $10, or sometimes even $12. In that case, the marginal cost to the company is less than the full $10 collected.

Consider gasoline taxes. The gas companies themselves hardly care what the tax is. When the tax is raised, it's raised on all gas stations equally, so there are no competition issues. If the tax goes up by 15c, they simply jack up the price by that 15c, and nothing else much changes. The marginal cost to THEM of the tax is $0. Therefore, they don't bother to oppose it since it doesn't really cost them.

When you as an individual are hit with higher taxes, you normally can't do that. Can you go to your boss and say, "The sales tax went up by a percentage point, I therefore need a percentage point increase in my salary"? You'd be laughed at. At best, when your next annual review comes around, the company **may** bear the tax increases in mind when determining the rate of increase for everyone - but more commonly not. So the marginal cost to YOU of the tax, is its full value.

Taxing, it is said, is the art of extracting the maximum number of feathers from the goose with the minimum of squawking. Corporate taxes are just another way of accomplishing this. If you are an opponent of bigger government and higher taxes, it is logical for you to try to arrange things in the opposite fashion - to channel taxes such that they collect the minimum number of feathers with the maximum of squawking. In many ways, that's the beauty of the Fair Tax.
March 5, 2008 9:29 AM
Add Your Comment...
4000 characters remaining
Loading question...