Corporate Taxes That Hurt You

Because you're paying them.

The famous bank robber Willie Sutton, when asked why he robbed banks, supposedly replied, "Because that's where the money is."

Politicians, being at least as smart as bank robbers, like to follow the same rules in establishing taxes.  It's not usually a good idea to try to raise taxes on the poor: they have more votes than money.  It usually seems that better results can be had by targeting those with relatively more money than votes - that is, rich people and big corporations.

As we've previously explored, there's a fundamental problem with hitting up corporations excessively: they don't pay most taxes.  Sure, their name is on the check to the Feds, but the money is actually coming from their customers.  When corporate taxes are raised, they just jack up prices or lay off employees accordingly, and it's still the poor(er) people paying it after all.

When the world was a smaller place, and international trade was much lower than it is today, this rule held true.  You as an individual consumer could only "consume" from stores near you, or at least in your own state and country.  No matter what the state or national tax rate might happen to be, you paid it wherever you shopped.  The high taxes might make you poorer by meaning you could buy less with your money, but the tax rate wasn't really relevant to your decision of where to shop.

Modern communications and transportation have changed the rules somewhat.  One of the long-running controversies over Internet taxes is based on the fact that states can levy sales taxes only on corporations that operate in their state.  If you have a store in New York, naturally you expect to pay sales taxes to the state of New York.  It's not reasonable for you also to have to file for sales taxes with Alabama, Alaska, Arizona, Arkansas, California, Colorado... and all the way down to Wyoming.  The paperwork would be immense.

But thanks to the Internet, it's perfectly possible for normal consumers to place orders with an out-of-state firm.  When this happens, in most cases you don't have to pay any sales tax at all - not to the state where the company is, because you aren't there, and not to the state where you live, because the company isn't there.

As e-commerce increases by leaps and bounds, the states and localities are screaming more and more loudly that they are being robbed.  Consumers can compete between governments based on sales tax rates; governments don't like competition any more than anyone else does  We've traded sales taxes for FedEx shipping charges.

The problem is even greater now that much of our consumption comes from overseas.  American firms, naturally enough, pay American taxes, and not just corporate income taxes, but property taxes, payroll taxes, sales taxes on their consumables, and the hard to quantify but immense overhead of compliance with our myriad regulations.  Chinese companies have to pay Chinese taxes but not American taxes, except at the very end of the line when the goods are sold to an American consumer in an American store.

The United States has one of the highest formal corporate tax rates in the world, at 40% when you include federal, state, and local taxes.  This is far higher than that of many other jurisdictions thought of as high tax, such as England (28%), Germany (30%), and France (28%).

In an era of more-or-less free trade, this is a serious handicap for American corporations - they must pay 10% more in taxes than their competitors in other nations.  And we wonder why we have a trade deficit?  Although there are other corporate forms that don't have to pay the highest level of corporate tax, such as S-corps and LLCs which make up the bulk of small businesses, the big international corporations are almost exclusively the C-corps that are charged the highest level.

This issue has been used to argue for higher tariffs against other countries.  If American firms must pay 40% to their government, and German ones only 30%, then shouldn't we levy a 10% tariff against German imports to level the playing field?

The problem with this approach is that it would help American firms retain their market share inside the U.S., but would do nothing to help their exports to other countries.  There is no shortage of nations that have used trade barriers to protect domestic industries, to good effect on the profits of those industries, but at great harm to everyone else.

The third world is notorious for high tariffs on manufactured goods, supposedly to protect domestic producers - but we see a notable shortage of effective domestic producers there.  Because of the lack of competition, the goods are shoddy and grossly overpriced.

Indian roads, for example, have historically been dominated by the Hindustan Ambassador, a car based on British designs from 1957 and offered mostly unchanged ever since.  On those rare occasions when the Ambassador has been re-exported into a foreign market subject to competition, it rightly sank without trace.

Is this in the best interests of the people of India?  No - and it wouldn't be in the best interests of American consumers either.  India, to their credit, has realized this, and over the last ten years allowed proper competition - and now the streets are occupied by newer, better, and cheaper cars from a variety of companies.  Was it good for the employees of the company that manufactured Ambassadors?  Surely not, and they protested the change, but the millions and millions of "everybody else" are much better off.

Corporate taxes, by definition, cannot be paid by the corporation in the long term.  The company must find a way to pass the costs on to the customers or it won't be in existence for very long.

Sometimes a tax rise will cause a company to die completely; other times, it'll just lead to higher prices for the customers.  But in our modern world, corporations have learned that the simplest way to avoid onerous taxes is, wherever possible, simply to move shop.

And isn't this just what we see today?  How many times are we told that companies are moving factories, offices, and production offshore to some other country where taxes, wages, and regulations are lower?  There's no doubt that thousands of jobs that once were done by Americans are now being done by Indians, Mexicans, Chinese, and hundreds of other nationals all over the world.

What you don't hear so much about is that, because the costs are lower, this has led to cheaper goods for Americans.  In fact, the single company Wal-Mart has been calculated to save American shoppers $263 billion - that's almost a thousand dollars per person. Or, put another way, it's 3.1% of negative inflation in prices.

But the real reason companies go to China is because the workers there work for pennies, right?  Wrong!  At least, mostly wrong now, and totally wrong shortly.

Yes, ten years ago the wages paid were a pittance.  This is no longer true - for many companies operating there, wages are increasing by 40% each year, and turnover rates approach 50%.  At that rate, it won't be long before Chinese salaries catch up with American ones, at which point there will no longer be a cost advantage.  India is already experiencing this with software programmers.

At that point, which is approaching faster than you think, the rate of corporate taxes from country to country will be even more important that it already is.  Ireland famously boosted its economy from the bottom rank in Europe to the top over the last twenty years, through setting a dirt-cheap tax rate of 12.5%.  Eastern Europe has learned this lesson, and is doing the same thing.

So why would we even think about raising our already-high corporate taxes?  If the goods affected are purely domestic, as with milk and most groceries, it'll just raise prices and rob the consumer.  Where there is foreign competition, there will be advantages to foreign companies and "American" companies that do most of their production offshore.  The American consumer will get laid off when his job goes overseas.

This election, when you hear a politician arguing for more taxes on companies, put your hand on your wallet - when the music stops, you'll be left with the bill.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments
Governmental competition exists in the US. Where I live, I regularly hear commercials on the radio for businesses to relocate in a city in a neighboring state. What's the key selling point? Lower taxes. That state has no corporate income taxes (but they do have a 2% goods & services sales tax that applies to everything).
March 10, 2008 10:08 AM
Yes - and that's why federalism is such a good idea. But the more taxes go up to the national level, the less effective will be government competition. And right now, the majority of corporate taxes, particularly concerning imports and exports, are federal.
March 10, 2008 11:39 AM
Excellent points here, Petrarch. It always amazes me that average citizens can get with the head-in-the-sand ideas of protectionism. Do we imagine that by building a huge wall of tariffs, the outside world is somehow taught a lesson? The only people we hurt with tariffs, high corporate taxes, and prohibitions on competition are ourselves.
March 10, 2008 12:57 PM
Did someone say... Fair Tax!? Go to and see how it would solve every issue you hate when it comes to the IRS and federal taxes
March 11, 2008 5:57 PM

The Fair Tax is a great thought, but as the famous Walter E. Williams said, spending is the problem. Nobody would complain about any taxes if our federal spending were less than 10% of the GDP. It's when spending gets out of control that ANY form of taxation becomes burdensome.
March 12, 2008 12:39 AM
Sure, that's true. But people would FEEL the spending more if it came out of consumption. That's the brilliant thing about the Fair Tax. Since you put it on consumption, it's very obvious when rates are increased or decreased. When your state adjusts its sales tax, EVERYONE across the state bitches and moans about it. It's VERY obvious. With the current federal income tax system, there are credits and decutions and all manner of ways in which the House Ways and Means committee hides how it steals and spends money. Since we all know that politicians will continue to steal and spend, the only long term solution is to make it OBVIOUS and HARD-FELT when they do. That brings about a natural sort of accountability, I think.
March 12, 2008 10:55 AM
One of the really great things Mr. Reagan did as governor of California was to force the state income tax to be VERY VISIBLE to taxpayers. The legislature wanted to make it hidden; Reagan wouldn't stand for that.
March 12, 2008 11:08 AM
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