Businesses Are People Too
Perhaps, we should also remember there is no such thing as a free tax. In the end, every tax reduces our ability to spend money as we see fit. But maybe people don’t mind taxes as much if they think someone else is paying them? It’s like being someone’s dinner guest; you worry less about the tab than when you’re paying for yourself.
Too many of us want to turn big business into an unwilling host at a free dinner party. We want them to pay taxes to give us government programs. We forget that businesses are people too. We can’t increase taxes on corporations without some real person paying the bill. In most cases, that bill is paid by those who least expect it: you and me.
Most principles of economics classes include a discussion on taxes in which the instructor demonstrates that the tax burden often falls on the shoulders of those who do not directly pay the tax. Part of the tax burden on businesses will be shifted backward toward workers and part will be shifted forward toward consumers. Taxes on businesses are paid for by workers in terms of lower wages, consumers in terms of higher prices, and, yes, by the owners in terms of lower profits. Who bears the largest share of the tax burden will be determined by who can least avoid it. Those with the fewest choices will pay the largest share of the tax bill.
Tax shifting can be explained in terms of choices and mobility. Workers who have choices are mobile. They can move from one occupation to another or one area of the country to another. If wages in their current job drop, or more likely don’t keep up with inflation, they may be able to move to another. Who is left behind at the lower wage? Those who aren’t mobile either because they lack the requisite skills or the funds for relocating will have to work for less. This includes the poorer and less educated among us. Consequently, any backward tax incidence is likely to hit hardest the group that can least afford it.
On the consumer side of the market, the results will be similar. Those consumers who can do without or can substitute other goods will avoid any forward shifting of the tax. Less mobile consumers, whose choices are limited either because the goods are necessities, or because they don’t have the resources to search for alternatives will have to pay the higher prices.
Lastly, that part of the tax burden that cannot be shifted onto the shoulders of workers or consumers will ultimately be borne by the current stockholders. They will see some of their wealth eroded by the tax. Any new investors, however, are likely to be unaffected. Money is the most mobile of all resources. It will flee toward anywhere the after-tax return is higher. While the rich and famous may be among some of those current owners of capital stuck with a fraction of the tab, the vast majority, unfortunately, will be all the little people who have money in pension and mutual funds. Some of that money they were planning on for retirement or college will now be funding current taxes.
When we examine state taxes, such as an increase in the Ohio corporate tax, all of these effects are exaggerated. Who’s more mobile, the corporate manager or the single mother needing daycare? Who has more choices, a buyer with Internet access to world markets, or an elderly resident unfamiliar with the new technology? The next time you hear someone complain about how big business should pay its "fair share" in taxes, you might remind them that you already do.
Ralph R. Frasca, Ph.D. is a professor of Economics at University of Dayton and a member of the Buckeye Institute Board of Research Advisors.
