Corporation Tax

It's headline news! In the 2005/06 financial year,

Almost a third of the UK’s 700 biggest businesses paid no corporation tax

However the data overestimates the real figure: corporations do not pay tax.

If you sniff about the accounts of a business you might notice that they've generated more revenue than they've spent as costs: profit! Across the economy as a whole, this might add up to a sizeable pot of cash, and you'd be very well tempted to say "Those corporations seem to be doing ok, why don't we take some of their profit and spend it on hospitals, babies, etc." Who could object to a tax on corporation? They're large, and can clearly afford it.

However corporations are nothing more than a legal fiction. They do not exist as an organic entity, separate from the  individuals who benefit from it. If profits are reduced, the company has three main strategies:

• Reduce the wages they give to employees
• Increase the prices they charge their customers
• Reduce the dividends they pay to shareholders

And therein we find the people, since only people can bear the burden of a tax.

Update: When I wrote this post I had an inkling that Tim Worstall had previously blogged on the incidence of the tax - i.e. which of the above three types of people ended up paying. As 'Luis Enrique' rightly points out in the comments, "If it turns out that the burden falls mainly on the dividend that would have pretty different political implications from if it fell on wages". So many thanks to Tim for informing us that, "70% on the workers in the form of lower wages, 30% on investors in lower returns".

Here's Greg Mankiw:

A new working paper from the Congressional Budget Office reminds us that the incidence of the corporate income tax is very different than it first appears.

domestic labor bears slightly more than 70 percent of the burden of the corporate income tax

Comments

[Luis Enrique]

Has anybody done any research do discover on which of those three ultimated payers the burden of corporate taxation falls? If it turns out that the burden falls mainly on the dividend that would have pretty different political implications from if it fell on wages.

[Tim Worstall]

The Congressional Budget Office did one. 70% on the workers in the form of lower wages, 30% on investors in lower returns.