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Are Corporate Income Taxes Passed onto Consumers?

by on March 12, 2015

I would like for this post to be a place to debate this topic.  There was a time where I thought that passing on taxation to consumers made sense to me.  As I made the assumption that taxes were a cost associated in overhead.  But is it really overhead?  Or is it exactly what corporate income taxes are supposed to be?  And that is an “after profit tax”.  It is important to understand that distinction.

Would it be wise for a company to add expected tax payments into a cost of a good?  If another company doesn’t care about “after profit taxation” then they could easily undercut a company that attempts to add that expected cost into their product or service cost structure.  That would then allow the competition to obtain more valuable market share and stronger revenues to capture more ad revenue and market penetration.  Most executives would fire their accounting staffs if they made the blunder of adding that cost into their pricing.

Let’s also take into consideration the fact that many businesses only pay taxes via individual tax rates as sole proprietors or partnerships and other corporation set ups.  I don’t have the percentage of businesses who pay taxes in this way but I do recall it being the majority of small businesses in this country, please correct me if I am wrong.  So if corporations that pay “after profit incomes taxes” have to compete with people who pay no corporate income tax, then it would be disastrous for them to include that tax in their cost structure as it would price them out of the market.

Now I am not arguing that corporations should pay higher taxes, as I believe that taxation for revenue purposes are obsolete.  But I can’t stand when this argument is made because it makes zero economic or logical sense.  What seems more illogical is that we are so quick to tax individuals who are the consumers of products and services that the companies provide and yet not quick to tax corporations who are now hoarding trillions in profits that could be used to increase wages and hiring.  So maybe the burden of taxation should shift from individuals to corporations?

As most who read this blog can attest to, I think taxation should be used as a redistribution tool and a punitive tool to help the consuming portion of our economic base consume more, so don’t let this be an argument for government revenues but an argument to reverse the tax structure to benefit business, by increasing their consumer base, and benefiting the lower classes to save and pay off debt more.

  1. Mustsign topost permalink

    National accounting, public accounting, tax accounting, financial accounting and cost accounting are not comparable between themselves or between territories. Yes, earnings before tax can be and is gamed to minimize tax, what do you think intellectual property is for? Amazon is a cashflow machine that gets the money into the hands of stockholders through buybacks, that money doesn’t need to be money that has been earned, it can simply be money that was received (thus borrowed). Also, the business of banking requires a certain propaganda about money which blurs that distinction, which is why we have the neoclassical neoliberal orthodox economics that we have. In their heart of hearts banking loves ponzi and is also why every business wants to be a bank. All successful corporations pass all costs (tax included) to the consumer but that’s not the same has not handing money to the taxman, cash and accrual accounting are different. One of the problems with small businesses is that they borrow on the owners liability whilst the large corporations do not, Donald Trump has even managed to have a casino go bankrupt when casinos are the most upfront businesses on the subject of the odds being in their favour. A more honest and just economic system would do away with limited liability (among other things) and replace it with a basic income/job guarantee but that’s highly unlikely to ever happen. America has the largest corporations because the american oligarchs understand money, the system was built by them and they own it. People feed on edibles, corporations on money, the trick is in getting the second to work for the former.

  2. Dan Lynch permalink

    Good post, JP.

    The original advocate of abolishing corporate taxes, Beardsley Ruml, made some qualifications, which are too often overlooked today:

    “Suppose the corporation income tax were removed, where would the money go that is now paid in taxes? That depends. If the industry is highly competitive, as is the case with retailing, a large share would go to lower prices, and a smaller share would go to higher wages and in higher yield on savings invested in the industry. If labor in the industry is strongly organized, as in the railroad, steel, and automotive industries, the share going to higher wages would tend to increase. If the industry is neither competitive, nor organized or regulated — of which industries there are very few — a large share would go to the stockholders.”

    At the time Ruml wrote his paper, anti-trust laws were enforced and labor was strong, so Ruml felt that a reduction in corporate taxes would either result in lower prices or higher wages.

    But today businesses are highly monopolistic and labor is weak. It seems likely that a reduction in corporate taxes would simply be a windfall to shareholders (the 1%).

    Another question is where are the consumers located? For example, if Louisiana taxes oil companies, and if the oil is sold in New Jersey, who cares whether the tax comes out of the company’s profit, or whether it is passed onto consumers in New Jersey? Either way, it’s not Louisiana’s problem.

    A related subject is whether Henry George’s land value tax would come out of the landlord’s profit, or whether it would simply be passed onto renters? Maybe you can write about that in another blog?

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