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Big Companies Pass The Buck

Corporations don't pay taxes - you do.

By Petrarch  |  March 4, 2008

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.